Taxes become more complicated during retirement, mainly because you lack a full-time income and it is a must to make every penny count. Consider the following tips to keep your nest egg intact and keep Uncle Sam’s hand at bay.
- Carefully convert to a Roth IRA.
Once you near 71, the government demands you to start making annual withdrawals from most types of retirement accounts, which are taxed. To lessen this blow, consider gradually converting portions of your traditional retirement funds over to a Roth IRA. These are not subject to the required minimum distribution. Of course, you have to do this long before you reach your 70s.
- Donate to a charity of your choice.
Giving to charity offers you a big tax break. You can donate the money that you must withdraw for any required minimum distribution tied to an IRA or 401(k). If you are aged at least 70 1/2, you can donate up to $100,000 of your annual required minimum distribution and it will not be taxed.
- Weigh in on capital gains.
Your capital gains tax rate follows the size of your income. If your income falls below a certain level, you do not have to pay any capital gains taxes on investment gains held for over a year. It can make sense to sell stocks and other long-term investments when your income is lower. But weight it carefully because you do not want to sell stocks just to get a tax break.
- Delay Social Security.
Yes, your Social Security benefits are taxed. One way to avoid this is to delay your claim. If you wait until you are 70, the size of your monthly benefits significantly increase.
- Keep your expenses down.
While you are required to make the withdrawals once you reach 70 1/2, you do not have to take more than that. Stay frugal, do not spend any more than you have to, and there is no need to dip further into your accounts that could push your tax bills up. Continue being smart with your money the way you have been throughout your early life.