Preparing for retirement is more than just saving money – it’s also about understanding different tax-efficient retirement planning strategies at your disposal. That’s because you’re still liable to pay taxes on any income you receive. This applies to ordinary income (wages, interest, capital gains, etc) as well as social security.

On top of that, you’ll also be taxed on how much you withdraw from your retirement account. Money taken out of a traditional IRA, 401(k), or 403(b) is also treated as taxable income. And while you may have different sources of income, there are ways to minimize how much tax you pay for them.

Planning for retirement can be complicated. But we’re here to make sure you have the financial security and comfort needed to enjoy your golden years!

Income During Retirement

Before we dive into different tax-efficient retirement planning strategies, let’s talk about earning income as a retiree. Generally speaking, there are three main ways to get income – through social security, investments, individual retirement accounts (IRAs), and retirement plans.

However, the type of income isn’t the only thing you need to consider when it comes to taxes. Where your money is invested and the order in which you withdraw the money also impacts your tax responsibility.

With those things in mind, there are certain strategies to help you maximize your savings during retirement.

Tax-Efficient Retirement Planning Strategies

Live in a Tax-Friendly State

Where you live in the U.S. has a major impact on how much tax you pay during your tax filing. There are currently eight states that don’t charge income tax – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. You aren’t required to pay taxes on your retirement benefits if you earned money in a different state, so relocating can be a smart financial decision.

Besides these eight states, others might have special tax breaks or benefits for retirees. For example, 39 states do not tax Social Security benefits while 17 don’t charge tax on your pension.

Consider Different Investment Strategies

Putting your money into different types of financial accounts can help you save money on your taxes. Here are a couple of strategies to consider:

• Investing in municipal bonds: the interest is free from federal income tax
• Receive qualified dividends: these stocks have lower tax rates than ordinary income
• Offset capital gains: sell your investments or property at a loss lowers your taxable income
• Invest in growth-oriented stocks: as long as you have the stocks for 12 months, you can take advantage of the lower tax rate

Anticipate the RMD

As we mentioned earlier, the order in which you withdraw your money impacts how much you owe in taxes. If you’re under the age of 73, you can choose which accounts you draw from. For example, tax-deferred, taxable, or tax-free.

But if you are older than 73, you’re required to take a certain amount out of your funds each year. This is called the required minimum distribution, or RMD. When you take out an RMD, you’ll be taxed as if the amount is ordinary income (which could push you to a higher tax bracket).

However, there are ways to minimize your RMD tax burden. One way to avoid being taxed on your RMD is to transfer the funds (up to $100,000) to a charity. The next is to convert your money into a Roth account, which we will discuss next.

Convert to a Roth IRA or Roth 401(k)

A Roth IRA or Roth 401(k) is a tax-free account. That means you can withdraw money without having it added to your taxable income. If you would have money in another account, you can convert it into a Roth. However, this involves taking out the money and paying taxes on that withdrawal. Therefore, you shouldn’t convert all your money at once, as doing so might push you into a high tax bracket for that year.

But once the funds are in your Roth, you can take them out during your retirement without paying taxes. And unlike traditional savings accounts, there’s no RMD. That means you can have more flexibility when it comes to saving and withdrawing money, making it one of the best retirement planning strategies.

Delay Social Security Benefits

Social Security is a great benefit if you need cash during your retirement. But if you don’t need the money, you can delay the receipt of the benefits. This is one of the best tax-efficient retirement planning strategies because it can lower your amount of taxable income.

The amount of tax you owe on social security depends on your provisional income. If you earn less than $25,000 as a single file or $32,000 as a joint filer, you aren’t required to pay taxes. But if you earn between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint), you will pay 50% tax on the benefits. If you earn more than this, then up to 85% of your income will be taxed.

If you are earning income from other sources, you can delay social security to avoid paying 50% or even 85% tax on it. Wait until you are in the lower tax bracket to take the benefits tax-free.

You can use this calculator on the IRS website to determine how much of your benefits will be taxable.

With these tax-efficient retirement planning strategies, you can ensure you have a comfortable and financially sound retirement life. Even though you’re done working or looking for jobs, it’s still crucial to know how to manage your finances. But if you’re still working, we have some business tax tips to consider. Either way, we want to help you minimize your tax burden and maximize your benefits. That’s why we recommend working with a tax professional (as an individual or as a business).