Tax Tips for Retirees

The information in this article is up to date for tax year 2023 (returns filed in 2024).

No matter your age, it’s never too soon to start planning for your future. When considering your retirement, whether it’s around the corner or still decades away, it’s important to account for your taxes.

Your tax liability in retirement will come down to your filing status, total taxable income, and retirement income sources. Below we’ll offer tips and strategies for maximizing your retirement income while minimizing your tax burden in your golden years.

Is Retirement Income Taxable?

Generally, yes. Depending on your situation, the state you live in, and the specific income you earn, most retirement income will be either fully or partially taxable.

Retirement income that is considered taxable income includes:

• Distributions from traditional 401(k) and IRA accounts
• Other investment income
• Social Security benefits
• Income from full-time or part-time work
• Pension payments

*Exceptions include Roth IRA and Roth 401(k) distributions, which are tax-free on withdrawal after five years if you’re age 59 1/2.

However, just because retirement income is taxable doesn’t mean there aren’t ways to reduce your tax burden overall.

Use the following tips to lower your tax liability and minimize your taxable income in retirement:

1. Retire to a State With a Lower Tax Burden

Where you retire can have a big impact on your retirement income and tax burden during retirement. Each state treats income and retirement taxes differently, and several states don’t tax income at all.

States That Don’t Tax Retirement Income

The following states have no state income tax, which means they don’t tax wages, salaries, dividends, interest, Social Security retirement benefits, retirement distributions, or pension payments:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

In addition to these states, Illinois, Iowa, Mississippi, and Pennsylvania do not tax retirement income. And New Hampshire does not tax wages, salaries, pension payments, or retirement account withdrawals–however, it does tax dividends and interest, which often make up a portion of retirees’ income. If you’re looking for a place to retire, these states may leave you with more money in the bank.

2. Make Strategic Withdrawals

Your tax rate is based on your annual income. When you retire, you can make strategic withdrawals to limit your taxable income for the year.

For instance, if you have money in a traditional 401(k), those distributions will be taxed. But if you have retirement investments in traditional and Roth IRA accounts, those distributions may be tax-free. By relying on tax-free distributions for the majority of your income, you can keep your taxable income to a minimum.

Pro Tip: You can convert pretax plans (like your 401(k)) to a Roth IRA and reduce future tax liability. You’ll have to pay taxes on any of the pretax funds you convert, but once they are transferred, those distributions will be tax-free.

3. Take Your Required Minimum Distributions

You can’t leave your retirement investments in your account forever. You must start withdrawing funds from your retirement accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022). The Required Minimum Distributions (RMDs) are the minimum amounts you must take out.

RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and other retirement plan accounts like your 401(k) (with the exception of Roth IRAs). If you fail to take your RMDs, you will be hit with a high penalty (a 50% excise tax on the amount not withdrawn).

You’ll need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return for the year in which the full amount of the RMD was required but not taken.

You can calculate your yearly RMD through Investor.gov.

4. Take Advantage of Tax Breaks for Retirees

There usually aren’t as many deductions available to retirees, but there are a few you should be aware of:

Take the Higher Standard Deduction for Seniors

If you’re age 65 or older, the standard deduction is higher. This may impact whether you itemize your deductions or simply take the standard deduction. What you can deduct is based on your filing status.

For the 2023 tax year, the standard deductions for seniors are:

Take the Spousal IRA Deduction

Generally, you must have earned income to contribute to an IRA. But if your spouse still works, they can contribute to both their own IRA account and yours—up to $6,500 per person (for 2023)—if you file a joint return. The couple can contribute a combined total of up to $13,000 per year or $15,000 if both are 50 or older. Those contributions are then deductible from your taxes. This is a great way to reduce your tax bill while putting more money away for retirement.

Deduct Long-Term Care Insurance

Long-term care insurance covers care expenses in places like nursing homes and assisted living facilities. If your plan meets the federal government’s tax-qualified requirements, you can deduct the premiums you pay as medical expenses (if your total qualified medical expenses exceed 10% of your adjusted gross income). Additionally, under qualified plans, the benefits you receive are not typically considered taxable income.

The amount you can deduct is based on age:

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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.