Your tax situation can change rapidly throughout retirement. Applying appropriate tax strategies can help you learn how to reduce the taxes you owe so you keep more of the money you’ve earned and invested.
Knowing what is and isn’t taxable
Understanding which sources of retirement income are taxable and which are non-taxable can be tricky. These guidelines can help you get started by looking at some typical retirement income sources. When evaluating your options, be sure to consider all sources of income, and work with your advisor and tax professional to determine what makes sense for your unique situation.
Withdrawals of earnings and pre-tax contributions from IRAs, 401(k)s*, and other retirement plans
*Special rules apply to appreciated employer securities in qualified retirement plans.
To help you determine what, if any, part of your Social Security is taxable, the IRS has created a series of worksheets found in IRS Publication 915 (Social Security and Equivalent Railroad Retirement Benefits). The calculation is part of filling out your 1040 and is found in the Form 1040 instructions.
Minimizing taxes when possible
Work with your tax advisor to help reduce the amount of taxes you may pay during retirement by considering the following:
- Possible advantages of deductions available to you.
- If you itemize, use charitable gifts to potentially lower your taxable income.
- Realize long-term capital gains if your income falls below the threshold for your filing status, so that they will be taxed at 0%.
- If you’re in a higher tax bracket, consider selling stock at a loss to offset current gains and up to $3,000 of ordinary income. Unused capital losses can be carried forward.
- You may be able to lower your lifetime taxes by spreading withdrawals from your IRA or 401(k) over your lifetime (even before age 70-1/2).
- The sale of your home. You may be able to exclude capital gain on the sale of your primary personal residence up to $250,000 if you are single and $500,000 if you are married (and filing a joint return).
- Investments in municipal bonds to generate tax-free income if you are in a higher tax bracket.1
- Whether bunching itemized deductions in any given year may be beneficial compared to the standard deduction. Be sure to consider the increased standard deduction as a result of the tax reform legislation passed in 2017.
Sometimes it makes sense to pay taxes now to lessen your future tax liability, especially if you expect to be in a higher tax bracket in the future. If you might be in this situation, consider converting part, or all, of your traditional IRAs to Roth IRAs.
It is important to note that significant changes were made to the tax code as a result of the tax reform legislation passed in 2017. Given these changes now is a great time to review your circumstances with your tax advisor. Additionally, many of the changes impacting individuals are set to expire after 2025 unless Congress acts. As tax laws and you situation change, it is important to remember to discuss with your tax advisor.
The benefits of working with a financial advisor and tax professional
Your advisor can help you balance your financial priorities with tax implications by helping you create a lifetime plan that meets both your personal and financial goals. Because your Ameriprise financial advisor understands your finances, he or she may also be able to recommend a tax professional for you. Working together, your Ameriprise financial advisor and your tax professional can help structure your investments and retirement distributions for tax efficiency.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
1Interest income from municipal bonds is federally tax-free, though the alternative minimum tax may apply. Interest income from municipal bonds is also generally state tax-free to residents of the state in which the municipal bond is issued, and generally taxable to residents of other states, depending on individual state rules. Sales of municipal bonds can result in federal and state capital gains or losses.
There are risks associated with fixed income investments, including credit risk, market risk, interest rate risk and prepayment and extension risk. In general, bond prices fall when interest rates rise and vice versa. This effect is more pronounced for longer-term securities.
Withdrawals from traditional IRAs, 401(k) accounts, and other pre-tax investments prior to age 59½ are generally subject to a 10% IRS penalty on taxable earnings, though exceptions may apply.
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