How To Reduce Taxes In Retirement: 7 Ways To Lower Your Tax Bill In Your Golden Years
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If you’re a retiree or on a fixed income, keeping your taxes low is one of the most important strategies for paying the bills. By reducing the amount you owe Uncle Sam, you’ll keep more in your own pocket and be able to spend on the things that are meaningful to you and your family.
Here are some of the best ways to reduce your taxes in retirement and what to watch out for.
7 ways to lower your tax bill in retirement
1. Go with a Roth IRA or Roth 401(k)
Workers can save with pre-tax IRAs and 401(k)s, letting them avoid taxes on their contributions and growing their assets tax-deferred. While it may feel great to get a tax break today, retirees will owe taxes on their withdrawals later, after years and maybe decades of growth.
But using Roth accounts – either a Roth IRA or Roth 401(k) – can get rid of that later tax burden. With a Roth account, you’ll pay taxes when the money goes in, enjoy years of tax-free growth and then withdraw the money tax-free in retirement.
“If you aren’t retired yet, you can change your future contributions in your 401(k) to Roth instead of traditional, so you don’t compound an already huge tax problem,” says Daniel Razvi, COO, Higher Ground Financial Group in Frederick, Maryland.
Worry about taxes on the front end, and you won’t have to worry about tax rates later, when your income is less certain. And many analysts expect tax rates to rise in the near future. Work with one of the best brokers for Roth IRAs for low-cost access to potentially high-performing assets.
2. Convert pre-tax retirement accounts
But what if you’ve already stashed your cash in pre-tax retirement accounts? You have the ability to convert those accounts to Roth accounts and dodge future tax increases.
“With tax increases on the horizon in 2026, now is the time to get as much money over to the tax free bucket as possible while taxes are ‘on sale,’” says Razvi. “You can convert IRAs to Roth by paying the taxes now, and then you will never be taxed again on the growth for the rest of your life.”
Yes, that means you’ll need to pay taxes on the conversion, but you won’t have to worry about future tax increases. And you don’t need to do the conversion all in the same year, either. You can space out Roth IRA conversions over multiple years to help reduce the tax impact today.
3. Slash your expenses before retirement
One of the best ways to cut your taxes is to reduce the amount you’ll need in retirement, keeping you in a lower tax bracket if you do take withdrawals from pre-tax sources such as traditional IRAs. This strategy also has the extra benefit of giving your money more time to compound.
Focus on the big, unavoidable expenses such as a mortgage or car payments before finding other places where you may be able to trim expenses such as lifestyle costs.
4. Reduce taxes on Social Security
Normally you’ll pay tax on up to 85 percent of your Social Security benefit, but it’s actually possible to reduce the amount of your benefit that is taxable, even to pay no tax on your benefit. However, you’ll need to realize low levels of income to fully escape the taxman.
If your provisional income is less than $34,000, then you’ll pay tax on 50 percent of your benefit, while if you can get that income under $25,000, none of your benefit is taxable. The IRS defines provisional income as the sum of your adjusted gross income excluding Social Security, any tax-exempt interest and half of your Social Security income.
Of course, getting your income that low may not be an advisable strategy for other reasons.
5. Take advantage of no taxes on capital gains
If you have a lot of money in a taxable brokerage account, you may be able to skip the taxes on a huge chunk of income, if you structure things right. In fact, you can recognize well more than $100,000 in income and pay no taxes on it – by taking advantage of long-term capital gains rates.
As of 2024, the IRS taxes long-term capital gains at 0 percent for taxable income up to $94,050 for those married filing jointly. You can then even work and earn income up to the standard deduction for a married couple – $29,200 in 2024 – and pay no income taxes on that, too.
You can use this strategy instead of tapping Roth accounts, helping to amass more cash inside those protected accounts that is fully tax-free regardless of how much you withdraw. And you can even add an incremental tax break by realizing any capital losses via tax-loss harvesting.
6. Invest in real estate
Investing in real estate can help generate income while providing a significant tax shield for that cash flow. The income produced from real estate can be offset with depreciation, and the asset can be passed down tax-free to heirs, letting them avoid capital gains taxes on the appreciation.
“If you find the right property with good cash flow,” says Razvi, “the long-term tax benefits can outweigh the risks.”
If you’re not that keen on operating real estate, it could make sense to invest in publicly traded real estate investment trusts (REITs). REITs can generate quarterly income – no sweat equity required – and they enjoy an extra 20 percent deduction on pass-through income at tax time, too.
7. Give straight to charity
While normally you have to surpass the standard deduction each year to get a tax break for a charitable deduction, those with a traditional IRA can make what’s called a qualified charitable distribution (QCD) and get one anyway. With a QCD you can contribute up to $100,000 to qualified charities each year when filing as an individual or $200,000 when married filing jointly.
“It allows a more modest charitable giver to annually take advantage of the larger standard deduction while still reducing their taxable income dollar for dollar for their charitable contributions,” says Brian M McGraw, senior wealth advisor, Hightower Wealth Advisors in St. Louis.
You’ll need to be at least 70 ½ when you make the distribution to take advantage of the QCD. Also, if you’re taking required minimum distributions from your IRA, this kind of charitable donation counts toward that minimum, too.
“For example, if a client’s RMD is $20,000 and they give $10,000 away via QCD and use the rest as income, they’ve cut the taxable portion of their RMD in half,” says McGraw.
What to watch out for when reducing your taxes
As you try to reduce taxes during retirement, advisors also warn about the following issues:
- Stay balanced. No one minds reducing their taxes, but it’s important to balance that with generating enough income to live on, too. So minimizing taxes is not the only goal here. Maintaining that perspective is key if you want to have income and be able to enjoy it.
- Don’t convert IRAs going to charity. “For Roth conversions, if you are already retired and you plan to leave the balance to charity at death rather than to your kids, it usually does not make sense to do the Roth conversions since the charity pays no taxes,” says Razvi.
- Watch out for real estate risks. Razvi cautions those managing real estate to watch out for occupancy risk and maintenance risk. You’ll need to keep reinvesting in your property if you intend to rent it out, meaning you may be hit with expenses when you don’t expect them.
A financial advisor can help you make the smartest moves to reduce your taxes and keep more of your money. The sooner you start making those moves, the easier your retirement can be. Bankrate offers a financial advisor matching tool to match clients with advisors in minutes.
Bottom line
If you’re planning your retirement finances, you have a number of avenues to reduce your taxes. But it’s important to balance that goal with actually enjoying your retirement, too. So it may not always make the most sense to minimize taxes if it significantly hurts your quality of life.
