Saving for retirement is important, but keeping more of what you’ve saved is just as crucial. Without proper planning, taxes can eat into your hard-earned money, reducing the funds available for your later years.
The good news is that smart tax strategies can help you lower what you owe and make your savings last longer. By understanding how different retirement accounts, withdrawals, and tax laws work, you can create a plan that maximizes your income and minimizes unnecessary tax costs.
Key Takeaways
Smart tax planning is key to boosting your retirement savings by cutting down on unnecessary tax burdens.
- Mixing both traditional and Roth accounts gives you the flexibility to manage your taxes based on what you expect in the future and your personal situation.
- Putting money into your employer-sponsored plan—especially contributing enough to get the full match—can greatly increase your retirement savings while lowering your taxable income.
- Health Savings Accounts (HSAs) offer three major tax advantages for medical expenses, letting your money grow tax-free and be taken out tax-free for eligible health costs.
Using both traditional and Roth accounts
One way to manage taxes in retirement is by having both traditional and Roth accounts. A traditional 401(k) or IRA lets you lower your taxable income now because contributions are made before taxes. But when you take money out in retirement, you’ll have to pay taxes on those withdrawals. Roth accounts work differently. You pay taxes upfront when you contribute, but the money grows tax-free, and you won’t owe any taxes when you withdraw it in retirement.
Having a mix of both types of accounts gives you options. If tax rates go up in the future, you can take money from a Roth account without increasing your tax bill. If you’re in a lower tax bracket in retirement, you might withdraw more from your traditional accounts to take advantage of lower tax rates. This flexibility can help you manage your taxes better over the years.
Employer-sponsored retirement plans
If you have a retirement plan at work, like a 401(k), contributing as much as possible—especially enough to get the full employer match—can help you grow your savings faster. Many employers match a percentage of what you contribute, which is essentially free money. For example, if your employer matches 50% of your contributions up to 6% of your salary, making sure you contribute at least 6% ensures you’re not missing out.
For those over 50, catch-up contributions allow you to save even more in tax-advantaged accounts. This is a great way to boost your retirement savings in the years leading up to retirement while also reducing your taxable income.
Tax-free medical expenses with HSAs
A Health Savings Account (HSA) is one of the best tools for covering medical expenses in retirement. It offers three major tax benefits: contributions lower your taxable income, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
Unlike Flexible Spending Accounts (FSAs), which require you to use the money by year’s end, HSA funds roll over indefinitely. If you can afford to pay for medical expenses out of pocket while working, you can let your HSA funds grow and use them later in retirement when healthcare costs are likely to be higher. This allows you to pay for things like Medicare premiums, prescriptions, and long-term care expenses without increasing your taxable income.
Timing Roth conversions to lower taxes
A Roth conversion allows you to move money from a traditional IRA or 401(k) into a Roth IRA. You’ll pay taxes on the converted amount now, but once the money is in the Roth account, it grows tax-free and can be withdrawn tax-free in retirement.
The best time to do a Roth conversion is when you’re in a lower tax bracket. This could be after you retire but before you start collecting Social Security or taking required minimum distributions (RMDs).
Some people also take advantage of low-income years due to a career break or temporary reduction in earnings. By converting small amounts over time, you can reduce the taxes you’ll owe later on large withdrawals from traditional accounts.
Managing required minimum distributions
Once you turn 73, you must start taking required minimum distributions (RMDs) from traditional retirement accounts. These withdrawals count as taxable income, and if not managed properly, they can push you into a higher tax bracket.
One way to reduce future RMDs is by doing small Roth conversions before they begin. Since Roth IRAs don’t have RMDs, moving money into one can help lower your taxable income in retirement.
If you don’t need all the money from your RMDs, you can donate up to $100,000 per year directly to a charity from your IRA through a qualified charitable distribution (QCD). This allows you to meet your RMD requirement without increasing your taxable income.
Where you live in retirement also affects how much you’ll pay in taxes. Some states don’t tax retirement income, while others have high tax rates on Social Security benefits, pensions, and IRA withdrawals.
Moving to a tax-friendly state can save you thousands of dollars per year. However, it’s important to also consider healthcare costs, property taxes, and overall living expenses before making a move.
Planning now for a better financial future
The way you save, when you withdraw money, and where you live all impact how much you’ll owe in taxes over the years.
The earlier you start planning, the more flexibility you’ll have. Even small changes, like diversifying your savings between traditional and Roth accounts or making strategic Roth conversions, can add up to big tax savings in the future.
By taking control of your tax strategy now, you can keep more of your hard-earned money and enjoy a more financially secure retirement.
