6 retirement tax planning strategies you should know

If you're concerned about how taxes may affect you in retirement, you're not alone. About two-thirds of retirees say if they had to advise their younger selves on a financial matter, it would be to learn how taxes impact their savings, according to the latest Thrivent Retirement Readiness Survey.¹

By incorporating retirement tax strategies into your financial plan, you're keeping more of what you earn. That means you can enjoy greater financial security when you leave the workforce, enabling you to get the most from this exciting stage of life.

A strong retirement plan involves diversifying your holdings and choosing assets that match your risk-reward profile. But it's just as important to think about your savings and investment vehicles from a tax perspective. Following these six steps can help ensure you have less money going to the government and more of it left for the activities you love.

If you haven't yet entered your peak earning years or expect to be in a higher tax bracket in retirement, consider working a Roth IRA into your savings plan. You fund a Roth IRA with money you've already paid taxes on. While there's no tax deduction for Roth contributions, your earnings grow on a tax-deferred basis, and you don't have to pay tax on qualified withdrawals.² In addition, Roth IRAs are not subject to required minimum distributions (RMDs) like traditional retirement accounts are.

For many households, this delayed tax advantage can be dramatic, says Ron Lutes, a senior advice services consultant for Thrivent. "The thing we see with families is that they're in the 12% tax bracket, for example, and often contributing to a pre-tax account," he says. "But by the time they retire, they could fall into a 22% or 25% bracket."

As with traditional IRAs, Roth IRAs have annual contribution limits set by the IRS each year. For 2024, that cap is $7,000. However, catch-up contributions allow you to contribute an additional $1,000 per year if you're age 50 or older. Taking advantage of that provision can provide an extra boost to your savings.

Unlike traditional IRAs, however, Roth versions have income limits to contribute to one:

• Single or head of household: $146,000-$161,000
• Married filing jointly: $230,00-$240,000
• Married filing separately: $0-$10,000

If your earnings fall within the maximum modified gross adjusted income (MAGI) range listed above, you can contribute a reduced amount to a Roth IRA. If you make equal to or more than the maximum limits listed, you can't contribute anything to a Roth IRA.

Make too much to contribute to a Roth IRA? Explore these alternatives

If you already have a traditional IRA and are interested in a Roth IRA, consider if a Roth conversion makes sense for you.³ Using this strategy can help you achieve greater tax diversification and give you more options for withdrawing money when you reach retirement.

"We always like to have a component of the portfolio that doesn't have the potential to be taxed in the future," says Todd Yeiter, Thrivent's director of Advisor Support and Alignment.

While you'll have to pay income tax on the amount you convert in the current year, the long-term benefits are often well worth it. By converting your assets to a Roth IRA, you can take your conversion dollars and earnings tax and penalty free after 5 years and reaching age 59½.

Putting money into a Roth IRA can have tax benefits for your heirs, too. Non-spouses generally must distribute the account's assets within 10 years of your passing, regardless of IRA type. But if you own a traditional IRA and you're subject to RMDs at the time of your passing, your heirs need to keep making RMDs during that 10-year stretch. Roth accounts are not subject to RMDs, so family members can avoid taking taxable distributions right away. However, the beneficiary of the account still will need to take the full balance by the end of the 10^th year after the original owner’s death.

Learn more about inherited IRA rules for beneficiaries

In general, you only can contribute to an IRA up to the amount of your earned income. However, a spousal IRA enables your husband or wife to invest through these tax-advantaged accounts, even if they make little or no income through work. Spousal IRAs can take the form of either traditional or Roth accounts, enabling your partner to build a customized savings strategy that best meets their needs.

Let's suppose you earn $75,000 a year and contribute the maximum amount allowed—$7,000 for the 2024 tax year—to a traditional IRA. Even if your spouse goes to school full time and isn't earning income, they still can open a separate IRA in their name as long as you file a joint tax return. They can invest based on your earned income level, allowing them to also put in up to $7,000 a year.

As a family, that means you effectively can double your IRA contributions. "We see thousands of cases with clients missing this opportunity," says Tom Hussian, a senior advice services consultant for Thrivent. "If it'll lower your taxes, why not do it?"

Typically, the interest you generate from bonds held in a taxable account is treated as ordinary income on your return. However, most municipal bonds are exempt from federal income taxes, enabling you to reduce your overall tax burden. If you buy municipal bonds issued in your state, you also may avoid state and local taxes.⁴ These unique features make "munis" one of the most effective retirement tax strategies for those in a higher tax bracket.

You'll want to consult with your financial advisor and tax professional to ensure municipal bonds are a suitable fit for your financial situation. If you're subject to the alternative minimum tax, for example, munis may not provide the same tax savings.

7 ways to help reduce your taxable income

Discover practical and effective strategies to help reduce your taxable income. From retirement savings to smart investment decisions, opportunities to keep more of your earnings are at hand.

See the list

While the primary purpose of life insurance is to protect your loved ones, the right policy can help you and your family manage taxes. Unlike other retirement plan proceeds, beneficiaries receive life insurance death benefit payouts income tax-free.⁵

Permanent life insurance—such as whole life, universal life and variable universal life—also enables you to build cash value on a tax-deferred basis throughout your lifetime. Tax deferral allows your cash value to accumulate faster because growth is not subject to annual taxation.

Any portion of your cash value that you access through a withdrawal or policy loan is tax-free, up to the amount you've contributed through your premiums.^6,7 This aspect can be an advantage over retirement plans such as a traditional IRA, where any money you pull out may be subject to income taxes—and a 10% early withdrawal fee if you're younger than 59½.

Keep in mind, however, that any withdrawals or unpaid loans from your contract will reduce the death benefit available to your heirs when you pass away. Therefore, you may want to consult with a financial advisor before deciding to tap the policy's cash value for your own financial needs to ensure the advantages outweigh the potential drawbacks.

Donating to your favorite causes is an important way to live out your personal values—and you can generate some valuable tax savings when you do. Here are a few of the many ways you can give back while reducing your tax bill.

A charitable remainder trust is designed so you can give assets to charity and still receive investment income from them. You fund the trust by adding assets such as cash or publicly traded securities. During your life, the trust pays out income to you or someone you designate from the assets you contributed. After you die or the specified term ends, any remaining assets in the trust go to your charities of choice. The trust sells appreciated assets tax-free, and all the net sale proceeds are reinvested into the trust.

You may qualify for a tax deduction in the year you add assets to the trust, even though the charity might not receive the remaining assets for years. And if you can't use the entire deduction in the year you give, you may be able to carry it forward five additional years.

A charitable gift annuity involves donating assets in exchange for a stream of income payments. You may give cash, stocks or mutual funds to a favorite charity or charities, and in return, you receive a lifelong stream of income. The payment amount depends on your age (or the age of the annuitant) at the time of the donation; generally, the older you are, the higher the payment will be. At your death, the charity receives any remaining assets, which can be used to fund its mission.

This opportunity can allow a taxpayer to reposition retirement assets as well as other non-qualified assets, while minimizing their taxable income. Lutes uses the hypothetical case of a couple, ages 82 and 78, in the 12% tax bracket:

In the early 1980s they invested $1,000 in an up-and-coming tech giant and never touched it. Now, with perhaps half a million dollars or so in appreciated stock, they face capital gains taxes.

“When the couple funds a gift annuity with $100,000 of stock, they will begin to draw an annual income of $6,900 in the first year. They will also receive an income tax deduction of approximately $40,000. The deduction could help them recognize additional income without an increase in their taxes or lower their tax bill,” Lutes explains.

Qualified charitable distributions, or QCDs, allow you to satisfy your annual RMD by directly transferring funds from your IRA to a qualified charity. The money you donate does not count as income on your tax return, which allows you to support a place of worship or nonprofit organization while minimizing your taxes.

In 2024, you can make a distribution of up to $105,000 each year from an IRA as long as you're at least age 70½. If you're married, your spouse also can make QCD distributions of up to $105,000 per year, further reducing your household's tax burden.

While it's possible to develop a retirement plan on your own, working with a financial advisor can help ensure you optimize your results. They can help you select appropriate, low-tax savings vehicles and develop a tax-efficient withdrawal strategy once you reach retirement.

"There is a relatively narrow window of time to act to potentially reduce your tax burden," Yeiter says. "Although accountants and tax preparers focus on cutting your taxes today, not all can project what taxes might look like in the future."

Filling out the Tax Efficiency Checklist, available through your Thrivent financial advisor, can give you a better understanding of where your current savings and investments are sitting from an income tax perspective. You'll get a quick snapshot of how much you have allocated to each of the three tax categories: tax now, tax later and tax never. "Very few people have much, if any, money in the 'tax never' category," Yeiter says.

A Thrivent advisor also can run your numbers through Thrivent's proprietary What-If Tax tool, which generates side-by-side hypotheticals involving many of the tax-reducing tactics discussed above. The software allows financial professionals to test potential scenarios from a tax perspective and make recommendations accordingly.

Having a comprehensive strategy to reduce taxes, Hussian suggests, can make a dramatic impact on your financial health now and in retirement: "What if your friend is growing a vegetable garden and they're losing 2 out of 10 of their vegetables to poor soil conditions? If I could show them ways to lower that loss to 10%, I'm giving them something valuable."