Tips to Minimize Your Tax Exposure in Retirement

Original Article

Tax season is here. Many retirees assume that taxes won’t be a major expense, since they are no longer working. The truth is, however, taxes are often a significant expense for retirees. Many retirement income sources are taxable, including Social Security, qualified account distributions and even pension payments.

If you don’t budget for taxes, you could be in for a surprise in retirement. You may have less free income available. That could limit your ability to travel, pursue a favorite hobby or live the kind of lifestyle you envisioned for yourself in retirement.

Fortunately, there are steps you can take to minimize your tax exposure. Below are a few tips to consider as part of your retirement strategy:

Think about a Roth conversion.

Most qualified plans, such as traditional IRAs and 401(k)s, are funded with pretax dollars. This means you may receive a tax deduction for your contributions. Your funds then grow on a tax-deferred basis inside the account.

However, these funds can’t go untaxed forever. The IRS treats distributions from traditional IRAs and 401(k) plans as taxable income. That could be problematic in retirement if you’ve used a traditional IRA or 401(k) to accumulate most of your retirement assets.

One option to consider is a Roth conversion. As the name suggests, you convert a portion of your traditional IRA funds into a Roth account. You have to pay taxes on the converted amount. You won’t pay taxes on growth or distributions, however, assuming you wait until age 59½ and until the Roth has been open at least five years before you take a withdrawal. A conversion may create a tax liability today, but it could also eliminate tax exposure in the future.

Use your health savings account (HSA) for health care costs.

You’ll likely face a broad range of out-of-pocket health care costs in retirement. Fidelity estimates that the average retired couple is likely to pay $275,000 for health care expenses in retirement.1 That includes things like premiums, deductibles, copays and more.

However, you can use a health savings account (HSA) to pay for those expenses with tax-free distributions. With an HSA, you can make tax-deductible contributions, grow your funds tax-deferred and then take tax-free distributions to pay for qualified health care expenses. Using the HSA for your health care costs could reduce the amount you need to take from your IRA, thus reducing your taxable income.

Transfer your RMDs to charity.

Traditional IRAs and 401(k) plans are popular in part because they allow you to defer your taxes on investment growth. However, you can’t defer those taxes forever. The IRS requires you to take minimum distributions at age 70½. These required minimum distributions (RMDs) are treated as taxable income.

If you’d already planned on giving money to charity, however, you could take advantage of a unique exception to reduce your taxable income. The IRS allows you to donate your RMDs to charity and avoid paying taxes on the distribution. To do so, you’ll have to set up the distribution to transfer directly to the charity without passing through your account first.

Ready to develop your retirement tax strategy? Let’s talk about it. Contact us at Bridgeriver Advisors. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.


Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

17377 - 2018/2/13

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