Your income is likely to decrease after the retirement. Do not let the income tax department take a big bite out of your meager provision; draw out a strategy to keep the taxes at minimum after you leave the workforce. However, for a foolproof tax planning, you should have a basic understanding of taxation policies on retirement benefits. Unfortunately, most of the retirees lack knowledge on this subject. Here are a few tactics that would let you keep a larger portion of the saving for yourself after the retirement.
Utilize Your Standard Deductions and Personal Exemptions
The amount of standard deduction you are eligible for determines how much of your earning will be tax-free. As per the recent Internal Revenue Service (IRS) announcements, standard deduction amounts for single, and head of the household taxpayers are $6350 and $9350, respectively. The taxpayers, who are above 65 years or blind, are eligible to enjoy additional deduction of $1250. The amount increases to $1550 for those who fall into the above category and unmarried and not a surviving spouse as well.
An individual can claim the personal exemption on his or her income in addition to another exemption for each dependent. In 2017, IRS has set the exemption at $4050. However, it starts to phase-out if your gross income is $261500(or $313,800 if you are married couple and filing together).
Try Maximizing the Tax Bracket
If your taxable income at the age of 59 and a half is much lower than the highest level of your tax bracket and you have a large Individual Retirement Agreement (IRA), use a part of it to fill the gap. This tactic will help maintain a balance between the two when you will be 70 and a half years old and thus, you will be able to stay in the lower bracket.
In case, you do not need money right now, think of converting some part of your IRA into Roth IRA. Tax deductions according to the tax bracket you belong, are applicable to traditional IRA contributions making it a preferred option for taxpayers. However, the money you withdraw from traditional IRA is taxable which can be a burden for retirees. The Roth IRA contributions, on the other hand, are not subject to any initial tax deductions. But, if you are less than 59 and a half year old you can keep your Roth IRA open for minimum five years, subsequently, enjoying a tax-free distribution, irrespective of the fact that whether it comes from your contribution or the generated earning.
Minimize Taxable Portion of Social Security Benefit
In case, social security benefit is your only source of income, you will not have to pay any tax. However, your social security benefits will be taxed if you draw substantial income from other sources such as interests, dividends and more, on top of your benefits. If your total income ranges between $25,000 and $34,000 in retirement, you may have to pay tax on up to 50 percent of your benefits. However, there are several ways to reduce it.
Use your Required Minimum Distribution (RMD) for Charity:
RMD is the amount of money that must be withdrawn from your account every year. The taxpayers above 70 and a half years can donate up to $100,000 per year for charity from their IRA. It would then be treated as an RMD contribution, without being included in the Adjusted Gross Income. This technique will help lower the taxes.
Invest in a Qualified Longevity Annuity Contract (QALC):
The investment on QALC is not included in the RMD, keeping it low and thus, reduces the tax bills. Although the payout adds to taxable income, it does not start before you reach 85.
Have a Growth-Oriented Portfolio:
Identify the components in your portfolio that add to your income stream. Recognize the income that you do not need. Now restructure your portfolio to exclude the sources that create any extra income. According to the financial experts, a growth-oriented portfolio is a better option for keeping the taxes low.
While deciding on your post-retirement tax planning strategies, try to make the most of the exemptions you are entitled to get. Also, try to strike a balance between the traditional and Roth IRA and keep investing parts of social security benefits to reduce the tax burden in retirement.