How Can I Avoid Paying Taxes When I Retire?
Paying taxes during retirement is a harsh reality that many people are not prepared for when they retire. The key to reducing tax liability during retirement is early planning. If you wait until you retire, it may be too late to take advantage of some retirement-planning strategies.
Tax Planning Tips to Avoid Paying Taxes During Retirement
A Maryland tax attorney helps you devise a retirement strategy that minimizes the amount of taxes you must pay. The goal is to keep more money in your pocket to enjoy the things you want to do during retirement. Here’s how you do it.
Invest In A Roth IRA
A Roth IRA may be one of the best ways to reduce your tax liability during retirement. Your contributions to a Roth IRA are taxed as you invest the money into the retirement account. Therefore, if you follow the rules for a Roth IRA, your withdrawals, including income from investments, are tax-free during retirement.
Reduce Your Living Expenses
As you near retirement, focus on reducing your living expenses. Lower withdrawals from retirement accounts result in lower tax bills.
Focus on paying off debts that will not give you any tax benefits during retirement, such as credit card debts and personal loans. If you owe money on a mortgage loan, you might want to focus on paying off the loan before retirement. If your mortgage payments are applied mostly to principal payments, holding on to a mortgage during retirement does not provide any tax deductions for interest.
More To Another State
States with a high cost of living rate and high state tax rates can add to your tax liability after retirement. You must withdraw more funds from your retirement account to cover expenses. You also may deplete your retirement accounts too soon.
If you considered moving to another state, it might give you an advantage during retirement. Research the cost of living and tax rates for states to choose one that gives you the best tax benefit while meeting your needs and desires for a place to retire.
Open A Health Savings Account
A Health Savings Account (HSA) allows you to contribute pre-tax dollars into a savings account to pay health care expenses. As long as you use the money to pay for qualified health costs, you never owe taxes on the contributions or the earnings.
However, you must have a high-deductible health insurance plan that meets the IRS guidelines and other rules. There are limits on annual contributions for individual and family plans.
Manage Retirement Withdrawals
Having a mix of retirement accounts is another way to reduce tax liability during retirement years. You can plan to withdraw from taxable accounts during the years that you are in a lower tax bracket. Years that you might fall into a higher tax bracket withdraw funds from a Roth IRA.
You may want to convert funds to your Roth IRA in the years that you are in a lower tax bracket. You might pay taxes on the withdrawals, but you will be paying taxes at the lower tax rate those years.
Plan for Your Retirement with Help From a Maryland Tax Attorney
The above tips are just a few of the ways you can reduce taxes during retirement. Maryland tax attorney, Steve Thienel, can help you develop a plan that maximizes your retirement income.
