Tax strategies in retirement

Key Points

  • Distributions of earnings and pre-tax contributions are generally taxable.
  • Distributions of after-tax contributions are generally not taxable.
  • Qualified distributions from a Roth IRA account are tax-free.

 

Your tax situation can change rapidly throughout retirement. Applying appropriate tax strategies can help you learn how to reduce the taxes you owe over your retirement years 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 sources of retirement income are tax free can be tricky. These guidelines can help you get started by looking at some typical retirement income sources. When evaluating your options to determine how to draw down your accounts, 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.

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 earningsare 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

 

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 also found in the Form 1040 instructions.

How to minimize taxes in retirement

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.
  • If you are 70 1/2 or older, you can take a Qualified Charitable Distribution from your IRA that is not included in income and is not taxed.
  • Realize long-term capital gains if your income, including the gains, 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 capital gains and then offset up to $3,000 of ordinary income. Unused net capital losses can be carried forward into future years.
  • You may be able to lower your lifetime taxes by spreading withdrawals from your IRA or 401(k) over your lifetime (even before age 72 when you are generally required to start taking).
  • 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 and any limitation on the deduction for state and local 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 and other changes have been made more recently. Given these changes now is a great time to review your circumstances with your tax advisor. Additionally, many of the 2017 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.

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.

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.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by an financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.