If you're concerned about
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.
How to reduce your taxes in retirement
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.
1. Use Roth IRAs for the opportunity for tax-free retirement income
If you haven't yet entered your peak earning years or expect to be in a higher tax bracket in retirement, consider working a
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,
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.
2. Consider a Roth IRA conversion
If you already have a traditional IRA and are interested in a Roth IRA, consider if
"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
Putting money into a Roth IRA can have tax benefits for your heirs, too.
3. Open a spousal IRA to boost your contributions
In general, you only can contribute to an IRA up to the amount of your earned income. However,
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?"
4. Consider municipal bonds for federal tax benefits
Typically, the interest you generate from bonds held in a taxable account is treated as ordinary income on your return. However, most
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.
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5. Unlock the tax benefits of life insurance
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
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.
6. Reduce your taxable income through charitable giving
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.
Charitable remainder trusts
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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.
Charitable gift annuity
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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 (QCDs)
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.
Developing a tax-efficient retirement plan
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
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."