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Most people will enter retirement with less money than they need, so you’re wise to minimize taxes. In fact, even if you have saved a lot of money, you’ll still want to pay the lowest amount of taxes possible since you’re living on a fixed income. If you want to pay fewer taxes to the government in retirement, you’ve got to know what’s taxed and your tax bracket before you can make money-saving financial decisions like moving your money.
Key Takeaways
- Paying less in taxes means adhering to a few select rules, including knowing what income is taxable, when, and at what rate.
- It may be advantageous to convert to a Roth IRA during the years when your income is low.
- Moving to a lower-tax state can also be an effective way to lower taxes.
1. Know What’s Taxable
That’s easy—just about everything is taxable. The question is, when is it taxable? If you have investments outside of tax-advantaged retirement accounts, they’re taxable each year, whether you are retired or not. These may include brokerage accounts, real estate, savings accounts, and others.
Most retirement-designated income, on the other hand, is not taxable until you actually retire. Withdrawals from traditional IRAs, 401(k)s and 403(b)s, and payments from annuities, pensions, military retirement accounts, and many others may be taxable.
The Roth IRA, on the other hand, is a hybrid. The money you put into a Roth account is taxable before you make the deposit, but the investment gains are tax-free if you wait to withdraw them until you experience a “qualifying event.”
Turning 59½ is one qualifying event; some research on your own or with the help of a financial advisor will help you figure out the others, as well as which other assets are taxable, tax-deferred, or exempt.
2. Know Your Tax Bracket
For the tax year 2025, the top tax rate is 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are as follows:
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly)
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly)
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly)
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly)
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly)
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly)
The lowest rate is 10% for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).
For 2024, the top tax rate remains at 37% with incomes greater than $609,350 ($731,200 for married couples filing jointly). The other rates for 2024 are as follows:
- 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
- 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
- 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
- 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10% for incomes $11,600 ($23,200 for married couples filing jointly)
Understanding how much tax you’ll pay on income earned can help with proper planning.
3. Convert to a Roth
Remember, a Roth IRA taxes you now instead of when you withdraw the money. While you’re still working, paying taxes now eliminates the tax burden later in life when you need all the money you can get.
Assuming no changes to the tax code in the future, doing a Roth conversion in the years when your income is low will allow you to pay taxes at a lower tax bracket. This only works if it works out to where you’ll pay taxes at a lower rate now versus if you wait until retirement to withdraw funds. The downside to this strategy is it makes a number of assumptions, notably that you can reasonably estimate your tax bracket during your retirement years.
Tip
If you plan to convert a traditional IRA to a Roth, ensure you have enough money to pay your tax bill since the conversion amount will be taxed as ordinary income.
4. Tax Diversification
Just as you should diversify your investment portfolio to avoid large-scale losses, you should do the same with your taxes because your tax bracket will likely fluctuate at various times. When taxes are high, taking income from tax-free accounts can be useful. Then, when taxes are low, vice versa—a retiree may choose to take income from a taxable account.
5. Consider Moving
Ever wonder why Florida is among the most popular destinations for retirees? It’s not just the beaches and weather but also the lack of state income tax. Eight states in total have no state income tax—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire will join that list in 2025 when it fully phases out taxes on investment and interest income.
What Is the Best Way To Save for Retirement?
The best way to start saving for retirement is through a tax-advantaged investment account, such as an Individual Retirement Arrangement (IRA) or a 401(k) account, or a Roth IRA or a Roth 401(k). These arrangements allow someone to invest for retirement without paying taxes on the money they put in (for traditional accounts) or without being taxed on the gains (for Roth accounts). For some professions, such as public schools or nonprofits, there are plans with similar benefits but different names. In addition, if you qualify for a pension, that serves as an additional way to ensure that you have enough for retirement.
How Much Should I Have Saved for Retirement?
Your retirement goals should be based on your annual income and expected retirement expenses. Fidelity recommends saving up the equivalent of ten times your annual salary by the time you reach age 67. In order to get there, you should aim to have one years’ salary saved up by age 30, three years’ salary by age 40, and six years’ salary by age 50.
When Is the Best Time to Start Saving for Retirement?
You should start saving for retirement as early as possible, in order to take advantage of compound interest. Assuming an average growth rate of 6%, each dollar you invest at age 20 will be worth $4.29 by the time you reach age 65, but a dollar you invest at age 40 will only be worth $2.39. That’s an extra 44% of potential gains if you invest early.
The Bottom Line
The key to keeping your retirement taxes low is not to wait until retirement to start planning. Instead, make plans well before you need to rely on your retirement savings as your main source of income. Financial planning is no easy task. It’s best to seek the advice of a financial advisor with experience in designing tax-efficient wealth-management plans.