Here are a few tips for trimming your tax bill in retirement . . . whether your retirement is decades away, just around the corner, or you’re already living the dream.
Many people don’t know that a portion of your Social Security benefits will likely be taxed. And money you take out of your traditional IRA and 401(k) will definitely be taxed. Choices you make now will make it easier for you to lower your taxes when you’re living on your SS benefits and money you’ve invested.
One of the most common ways to avoid taxes in retirement is to invest in a Roth IRA. You don’t get the tax break now because you put money into the account after paying taxes on it. But then the money grows tax-free, and when you withdraw the money it comes out tax-free. That’s different from a traditional IRA or 401(k), which both give you a tax break the year you invest the money.
Another way to reduce your tax bill is to contribute to an HSA. You get to put in money pre-tax. The money grows tax-deferred and you don’t pay taxes on it as long as you spend the money on qualified health costs. This strategy gives you a double bonus. You reduce your tax bill in the year you contribute to an HSA. Then down the road when you have health expenses (which we all are sure to have), you have access to money to pay for them that is tax-free. There is a caveat though. You can only contribute to an HSA if you have a high-deductible health insurance plan.
For more information about these strategies, and other ideas about ways to reduce your tax bill in retirement, click here.