Ways to Maximize Your Tax Savings When Approaching and In Retirement

Universal advice about maximizing tax savings in retirement is hard to come by because every retirement saver and retiree’s situation is different.

For example, does it make sense to delay Social Security benefits for you or your spouse until 70, or is the upside of taking early payments a net benefit for one or both of you?

The answer may be completely different depending on your financial situation, life expectancy, ability to work and overall retirement goals, which is why generalized guidance should always be taken with a healthy dose of skepticism.

Consulting with a retirement planner, financial advisor or tax expert before you make any decision that will impact your retirement income, especially decisions that have significant tax implications, is likely in your best interest.

However, there are a number of common recommendations you may frequently hear or read when doing research on tax savings in retirement:

1. Maximize contributions to tax-advantaged retirement accounts such as 401(k)s, traditional IRAs, and Roth IRAs during your working years. Saving for retirement in tax-advantaged plans is one of the few universally suggested pieces of advice.
   

2. If you’re still working and suspect you’ll end up in a higher tax bracket in retirement, consider opening a Roth IRA or performing a Roth IRA conversion. After-tax dollars are invested into a Roth IRA, which means the money you withdraw in retirement isn’t taxed as income. If you’re currently being taxed at 22 percent but expect to be taxed at 32 percent decades in the future when you retire, it may make sense to pay the 22 percent tax now rather than the 32 percent in retirement.
   
   The IRS has strict rules on who can qualify for a Roth IRA. Your modified adjusted gross income (MAGI) needs to be below $144,000 (2022) for single filers (increasing to $153,000 for the 2023 tax year). Married and joint filers must have a MAGI under $214,000 as of 2022 (increasing to $228,000 in 2023).
   

3. Not every retiree or person considering retiring in the near future is fully apprised of all the tax implications of benefits. Social Security isn’t obligation free – it is considered taxable if your provisional income is over a certain threshold.
   
   You may want to consult with a tax preparer or financial advisor for specifics on how taking out Social Security early may impact your provisional income and your tax burden. Waiting until a later age, like 70, may help keep your income (and tax burden) lower in your latter working years. 
   
   Delaying Social Security benefits can contribute to the accrual of delayed retirement credits, boosting your Social Security for the remainder of your life. Spousal benefits and life expectancy can change the equation significantly, which is why there’s often no one-size-fits-all answer to the question of when to begin taking your Social Security benefit.
   

4. Some retirees may be able to make use of a strategy known as “tax-loss harvesting” to offset capital gains with losses from investments that have decreased in value. This can be a particularly powerful strategy for retirees with a significant capital gains burden.
   

5. Plan charitable contributions strategically. Some retirement savers and retirees may be eligible for a charitable IRA rollover or charitable trust to reduce their long-term tax burden.
   

6. Consider downsizing your home or relocating to a lower-cost area to reduce living expenses and taxes. Arizona is on the lower end of state real estate tax rates at just 0.66 percent as of the 2022 tax year. However, that can add up if you’re on a tight fixed income and you live in a high-value home. This can be especially problematic for property owners who have seen dramatic home appreciation over decades of living in the same house. (In Arizona, property taxes are based on Limited Property Value. A law approved by AZ voters in 2012 limited the rate of LPV increases to no more than five percent a year.)
   

7. Maximize your tax savings by taking full advantage of all the credits and deductions you might be eligible to receive. For some tax filers, the standard deduction may still be preferable to itemizing. In many cases, filers are taking the standard deduction because they simply aren’t aware of all the nuanced ways in which they may be able to benefit from current tax law. Working with experienced financial advisors or tax planners may help. Certain credits or deductions, like those related to disabilities, age or medical expenses, may be newly available for many recent retirees.
   

Consult with a tax professional or retirement planner.

Most retirees, including those well-versed in their retirement investments and finances, aren’t always fully versed in all the potential ways they could be reducing their tax burden in retirement. Having your plan reviewed by retirement planners is one of the most reliable ways to ensure your retirement income and taxes are fully optimized for your unique situation.
Contact Fullerton Financial Planning at (623) 974-0300 to speak with one of our retirement planners today.