5 Overlooked Tax Strategies to Consider When Retirement Planning

5 Overlooked Tax Strategies to Consider When Retirement Planning

If you were thinking that once you reach retirement, you can finally put your finances on autopilot, you’d be mistaken.

Yes, it’s true. After decades of hard work, careful planning, and tireless saving, you may still have to utilize some techniques in order to maximize your retirement income while at the same time minimizing your tax burden. 

But don’t despair. You’re already thinking ahead, and that’s the first step! Next, you’ll do some advanced tax planning and design, and before you know it, you’ll have set up the ultimate tax strategy, customized just for you, to get the most out of your investments in retirement.

Here are five possible ways you might not have thought about to save on taxes in retirement:

1. Choose your tax bracket wisely – The first thing to consider is your tax bracket. More than likely, it’s going to change after you retire since you’ll be going from collecting a regular working salary to determining your own income. In other words, by strategically planning where to draw your income from, you’ll actually have a bit of control over which tax bracket you fall into.

You might do this by bucking conventional wisdom and drawing down your tax-deferred accounts first, rather than the taxable accounts. That way, you don’t risk eventually paying a higher tax rate because you’re earning more taxable income from the withdrawals you’ll make from your tax-deferred accounts.

This may not be quite as simple as it sounds, or maybe it’s just as complicated as it sounds – federal taxes can be a tricky matter. If you’re considering going this route, it’s best to talk to your financial advisor before hashing out a plan.

2. Harness the power of spousal IRA contributions – Is your spouse planning to continue working after you retire? If so, you can take advantage of the ability for a working spouse to contribute to the individual retirement account (IRA) of the non-working spouse with little or no income.

This is an exception to the rule, which states that you must have earned income to be able to contribute to your IRA.

In 2021, the spousal IRA rule lets married couples, filing joint, to contribute $12,000 to IRAs per year, with an additional $2,000 in catch-up contributions if they are 50 or older.

3. Withholding/quarterly income tax payments – When you stop earning a paycheck, the government may stop withholding your income taxes automatically, except in the cases of pensions or systematic withdrawals.

When you retire, you’re on your own to estimate and pay taxes on what you expect to earn. If you expect to owe more than $1,000 in federal income taxes, you must make quarterly estimated payments in April, June, September, and January. If you fail to pay enough or don’t pay on time, you’ll have to also pay penalties and interest.

One way to avoid all that stress and hassle is to set up to have taxes withheld from your distributions and other payments, which takes the place of you having to make quarterly estimated tax payments. Simply instruct the administrator or custodian of any account for which you would receive a Form 1099 or W-2 to withhold enough to cover your income tax obligations for the year from any income you receive.

4. Thoroughly understand your retirement plan and avoid any traps – This one may be the most vital because mistakes can be so costly. You need to know what kind of plan you have (401(k)? IRA? Defined-contribution pension?), how it works, and most importantly, what the rules are.

Each type of retirement plan has a very defined, very strict set of guidelines, requirements, limits, and they can vary widely from one to the next. They can even change from year to year, based on IRS statutes.

Take the time to familiarize yourself with the type of plan you’re contributing to. Know how much you can contribute and withdraw and when to avoid taxes and penalties. For example, if you withdraw funds from your traditional 401(k) before the age of 59 1/2, you’ll pay a 10 percent penalty on top of taxes. Likewise, if you’re 72, you must start taking annual required minimum distributions (RMDs) from your retirement plan or fork over 50 percent of the amount of your RMD to the IRS.

Or, if during your working years, your employer is willing to match the first 6 percent of your salary that you contribute to your 401(k) plan, it’s a big mistake not to contribute at least 6 percent. You’re just leaving free money on the table.

You’ll also want to understand the tax ramifications of your contributions and withdrawals. If you have a 401(k), your contributions to that account are made with pre-tax dollars, which lowers your taxable income for the contribution year, and you won’t pay taxes on any earnings until you begin to make withdrawals, which can be a double win if you’re in a lower tax bracket in retirement.

Learn about the benefits your retirement plan offers, the options you have if you leave your employer, what’s expected of you, and how to contact someone if you have questions or concerns. And then, keep up to date with any plan changes.

5. Deduct your medical expenses – If you itemize deductions when you file taxes in retirement, you might be able to deduct significant medical expenses for which your insurance company doesn’t reimburse you. The downside is that you only qualify for this deduction once you’ve spent more than 7.5 percent of your adjusted gross income in one tax year.

So, for example, if your adjusted gross income is $50,000, you may be able to deduct anything over $3,750 in unreimbursed medical expenses. So if you have hospital or doctor bills totaling $10,000, up to $7,250 of that amount might be tax-deductible.

Additionally, you may also be able to deduct long-term care insurance premiums, nursing home care, prescription drugs, and other qualifying medical expenses as determined by the IRS if they’re over that threshold of 7.5 percent of your adjusted gross income.

If you plan to take a medical expenses deduction, you should keep detailed records, receipts, copies of bills and statements. In other words, be prepared to account for every expenditure in case the IRS requests documentation.

Have questions and concerns, or just not sure where to start? Be sure to reach out to a financial advisor for help in finding out how to implement these tax strategies and to learn about others that might be right for you.  At Uncommon Cents Investing, we specialize in working with individuals and families nearing retirement or who are already in retirement. We encourage you to schedule a call with and let us answer your most pressing financial questions, learn more about your situation, and help set and keep you on a successful financial path.


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More About the Author: Sheena Hanson

Sheena is a highly regarded financial expert known for her clear explanations and practical advice on complex financial matters. She earned her CERTIFIED FINANCIAL PLANNER™️ designation in 2010 and holds a Bachelor of Science degree in Finance from the University of Wisconsin LaCrosse.