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Tips to minimize your taxes in retirement: Retirement tax planning FAQs

These tips can help you minimize the taxes you owe as you near retirement and in your retirement years.

In this article, we’ll answer the following questions:

  1. What types of retirement income are taxable vs. non-taxable?
  2. What are some tax saving strategies to consider if I’m still working but nearing retirement?
  3. What are some tax-saving moves I can make before age 72?
  4. What is an RMD, and how does the RMD tax penalty work?
  5. After I stop working and my income is potentially lower, how can I take advantage of 0% or low tax rates?
  6. How can I reduce my taxable income while supporting charitable efforts?

What types of retirement income are taxable vs. non-taxable?

Taxable

Non-taxable

Social Security – up to 85% of your Social Security benefits may be taxable depending on the amount of income you have from other sources Social Security – if your total modified adjusted gross income is below certain limits
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. 
Withdrawals of after-tax contributions from 401(k)s, IRAs and other retirement savings plans (whether withdrawals are considered to be from after-tax or pre-tax contributions and earnings is based on the law and will depend on ordering rules applicable to the account)
Pension payments Qualifying withdrawals from Roth 401(k)s, Roth IRAs, and Roth 403(b)s

 

What are some tax saving strategies to consider if I’m still working but nearing retirement?

  • Consider taking advantage of any pre-tax deductions available to you. Review your financial position and consider contributions to your 401(k) up to the maximum allowed, including any catch-up contributions for those over age 50. Also remember to take advantage of company benefits such as pre-tax payroll deductions for flexible spending accounts, transportation, supplemental insurance, etc.
  • Review your assets to identify potential long-term capital gains (gains on assets held longer than one year), which are currently taxed at lower rates than short-term capital gains or ordinary income.
  • Consider selling securities in non-qualified accounts that have a capital loss, which may be deductible to the extent of any realized capital gains plus ordinary income of up to $3,000 per year. Please note that for taxpayers whose income, including any realized gains, is below specific thresholds, the tax rate on long-term capital gains is zero percent. In this scenario, recognizing losses simply to offset long-term capital gains may not be advisable since no long-term capital gains tax may be due. Consult your tax advisor. 
  • Approach charitable giving in the most advantageous way. For example, you might be better off giving appreciated stock that has been held more than one year to a charity, rather than a cash donation. You may get a tax deduction for the full fair market value of the asset, and an eligible charity could sell it without incurring capital gains tax on the appreciation.
  • Think ahead to estate planning to potentially help reduce the impact of estate taxes, if applicable. Annual gifting is one way to reduce the value of your taxable estate. For 2022 the annual gift tax exclusion allows each donor to give up to $16,000 to an unlimited number of recipients without paying federal gift tax or using part of their lifetime exclusion. Over time, this is a strategy you might consider to remove assets from your taxable estate.

What are some tax-saving moves I can make before age 72?

Because many retirees are in a lower federal income tax bracket before required minimum distributions (RMDs) begin at age 72, they have an opportunity to manage the impact of taxes on their income. If you’re retired and have yet to turn 72, here are few moves to consider: 

  • Converting taxable assets to a Roth IRA. If you expect to be in a higher tax bracket when your RMDs begin, consider converting pre-tax IRA investments to a Roth IRA before then. Think about your ability to pay the taxes on the conversion as well as your timeline before you would need to access the Roth IRA. Converting to a Roth IRA generates a tax bill, but it could be less expensive now because of your temporarily lower income tax bracket — and the temporarily lower federal income tax brackets that are set to expire after 2025.
  • Selling investments that have appreciated. The tax rate on long-term capital gains — assets held beyond one year — is based on your taxable income. If you have stocks, mutual funds, bonds or other taxable investments, it may make sense to sell appreciated long-term investments while your taxable income is lower. Some, or all, of net long-term capital gains may be taxable at the 0 percent capital gains tax rate if your total taxable income (including the realized gains) falls below the threshold for your filing status. Talk to your tax professional to see if this applies to you. 
  • Redeeming older savings bonds. While you’re in a lower tax bracket, you may want to cash in US savings bonds issued when interest rates were higher. If you have bonds issued more recently, talk to your advisor about your options, given rising interest rates.
  • Exercising employee stock options. If you own employee stock options, exercising them while you’re in a lower tax bracket may benefit you — especially if the current stock valuation is high.
  • Revisiting your withdrawal strategy. Because withdrawals from tax-deferred accounts are neither penalized nor required between ages 59 1/2 and 72, you have more flexibility and control with your withdrawal strategy for retirement savings. Your advisor can help you create a plan for how much money to withdraw each year to meet your goals while managing your tax liability over the years.

What is an RMD, and how does the RMD tax penalty work?

A required minimum distribution is the minimum amount you must withdraw annually from your retirement account when you are age 72 and older. It is recalculated each year. If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty equal to 50% of the amount not taken. Being aware of this ahead of time can help you avoid the penalty.
The simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they turn age 72 and continue RMDs by Dec. 31 every year after that. You can take more than the required amount — and people often do so. While the extra withdrawals don’t count toward RMDs for future years, they do reduce the base amount from which future RMDs are calculated.
Roth IRAs are exempt from RMDs while the owner is alive, but Roth 401(k) and Roth 403(b)s do have RMDs unless they are rolled over to a Roth IRA.

After I stop working and my income is potentially lower, how can I take advantage of 0% or low tax rates?

During the time between when you stop working and when you begin taking required minimum distributions (RMDs) at age 72, you could consider these opportunities with your financial advisor:
 

  • Standard deduction shelter. If you’re able to cover expenses with savings or other cash accounts, consider taking advantage of the standard deduction ($12,950 single; $25,900 married filing jointly in 2022). Depending on your other income, you could use the standard deduction to shelter up to $12,950/$25,900 withdrawn from a taxable account such as a 401(k) or IRA every year without paying federal income tax on that money. Income above the standard deduction amount starts being taxed at the 10% rate. If you have started taking Social Security benefits those amounts should be considered in the calculation because, depending on the amount of Social Security benefits, some of those benefits may be taxable as well. 
  • 0% long-term capital gains tax rate. While your income is lower before RMDs begin, you may be eligible to realize gains at the 0% long-term capital gains rate. Taxable income limits applicable to the 0% long-term capital gains are  $41,675 for those filing as single and $83,350 for those who are married filing jointly in 2022. The calculation includes the net realized gain in determining the amount of taxable income used to determine what qualifies for the reduced rate.


How can I reduce my taxable income while supporting charitable efforts?

If you’re interested in providing charitable support, donating to a non-profit organization with a qualified charitable distribution (QCD) can help you achieve that goal. A QCD is a nontaxable distribution from an individual retirement account (IRA) directly to an eligible charity. You must be at least 70.5 years old to take advantage of the QCD strategy. For taxpayers who have reached age 72, the QCD can be used as part, or all, of your RMD, removing the otherwise taxable RMD from your income, if done correctly. QCDs do not prevent a taxpayer from itemizing deductions, for the tax rules around QCDs talk to your tax professional.

Video: Learn how you can use your retirement assets to support causes that are important to you

You could also consider donating appreciated stocks or assets. If you donate appreciated stock that you’ve held for more than a year, then you’ll generally be able to claim a potential charitable tax deduction for the full fair market value of the stock. This approach saves paying the capital-gains tax that would result if you instead sold the stock and donated the cash.

Tax Center

Taxes can impact your financial investments and savings outcomes, even outside of tax filing. Visit our Tax Center for helpful articles, FAQs and other resources.

 

Tax Center

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 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.

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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.

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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