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2 Strategies to Reduce Your Taxes in Retirement

By Adam Levy – Updated Apr 10, 2019 at 11:57AM

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Incorporating these tactics into your planning could save you thousands in tax dollars.

You could be paying more taxes than necessary in retirement. But thoughtful planning with regards to your various investment accounts could save you thousands of dollars in taxes in your golden years. And for those with just enough in their accounts, those dollars can be extremely valuable.

Here are two strategies you can use to minimize how much you pay Uncle Sam in retirement.

1. Roth conversions

Some people are just too good at saving money. If you maxed out your pre-tax retirement accounts every year, you'll probably end up with a lot of money in a traditional IRA by the time you retire.

At age 70 1/2, the IRS will start making you take required minimum distributions (RMDs), which are essentially forced withdrawals from your account mandated by the government, so it gets a cut of your money. And if you have a lot of money in your traditional IRA, those RMDs might be more than you need to live on in a given year. Even if the withdrawals are not more than you need, you can still make those distributions more tax efficient and make sure they don't cause you to pay more in taxes than you have to.

The words IRA, conversion, and Roth on a piece of paper, with Roth circled in red pencil

Image source: Getty Images.

If you have money saved in a non-retirement investment account, you should start making Roth conversions in your first year of retirement. A Roth conversion is when you roll over funds from a pre-tax retirement account to an after-tax Roth account.

You can make an effectively tax-free conversion every year equal to your tax deduction minus your short-term interest and other income.

So, if you're married filing jointly, taking the standard deduction, and have no other income, you can convert $24,400 from a pre-tax IRA to a Roth IRA and pay $0 in taxes in 2019. Keeping it in the Roth account preserves the preferential tax treatment of the funds and locks in the 0% tax rate since you won't have to pay taxes on the distribution. 

Very high-net-worth retirees or older retirees might consider rolling over an amount that goes through the 10% tax bracket if their pre-tax account balances are very high. That will guarantee you only pay 10% on that distribution, which is a historically low rate, but it could reduce the opportunity to rollover funds at 0% later. Consider how much time you have left before you have to take RMDs and what the effective tax rate on those distributions might be to help decide how much to convert.

The bottom line: Develop a strategy to get as much money out of your pre-tax retirement accounts at the lowest possible tax rate before those RMDs force you to withdraw your the money.

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2. Take advantage of long-term capital gains taxes

As a retiree, it pays to understand how long-term capital gains get taxed. While most investors know long-term gains get preferential tax treatment, understanding how the long-term capital gains tax brackets work could enable you to lock in practically all of your gains at a 0% tax rate.

There are three long-term capital gains tax rates: 0%, 15%, and 20%.

Long-Term Capital Gains Tax Rate Single Head of Household Married (Jointly) Married (Separately)
0% $0-$39,375 $0-$52,750 $0-$78,750 $0-$39,375
15% $39,376-$434,550 $52,751-$461,700 $78,751-$488,850 $39,376-$244,425
20% Over $434,550 Over $461,700 Over $488,850 Over $244,425

Data source: Table by author.

(Note: These brackets take into account all taxable income, not just capital gains. If, for example, you have $25,000 of taxable income, you'd have to reduce the amount of capital gains you can take at the preferential tax rate by $25,000. But since many retirees will have only a limited amount of income, there's an opportunity to take a large amount of capital gains at 0%.) 

A married couple filing jointly should take the opportunity to realize up to $78,750 in long-term gains each year by selling appreciated assets you've held greater than one year. There's no wash sale rule for capturing taxable gains, so you can buy back those assets immediately after a trade settles to reduce time out of the market.

Keep in mind that these are gains on top of the principal you originally invested. Additionally, that $78,750 is on top of the amount you can withdraw or roll over tax-free from your pre-tax retirement account. A married couple could theoretically report $103,150 ($78,750 plus the couple's standard deduction) in income this year and pay $0 in taxes if they plan properly. 

What about Social Security?

Retirees performing Roth conversions and harvesting capital gains at 0% tax need to be mindful of Social Security and how it impacts those strategies. A portion of your Social Security benefits could be taxed if your taxable income is too high.

Taxable income is calculated by taking half of your Social Security benefits and adding it to other income and subtracting your deductions. Then to find what percent is taxable, see below:

Percent of Social Security Benefits Taxable






Up to 50%



Up to 85%

Over $34,000

Over $44,000

Data source: IRS. Table by author.

Unfortunately, if you want to keep living that tax-free retirement, Social Security benefits will put a hard cap on the amount of long-term capital gains you'll be able to take at 0%. That's not to say it's completely impossible.

The maximum Social Security benefit for someone retiring at age 65 in 2019 is $33,084. Taking half of that, $16,542, still leaves room for $15,458 in tax-free capital gains harvesting on top of the $24,400 you can convert or withdraw from your traditional IRA if you're a married couple taking the standard deduction. Many couples will receive much less than the max, though.

Two Social Security cards lying on a pile of dollar bills

Image source: Getty Images.

In this situation, however, it may be best to delay taking Social Security benefits until age 70 in order to maximize your ability to perform tax-free Roth conversions and increase the cost basis of your taxable investments as much as possible by harvesting capital gains at a preferential tax rate.

On the other hand, if you actually need the Social Security money, that means you probably don't have many opportunities left to maximize your tax savings with these strategies, so there's no real downside to taking the benefit.

It's important not to overlook taxes in retirement. Haphazard planning can result in a tax bill much higher than necessary. Know the rules, and take full advantage of the 0% tax brackets available.

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