If the two inevitabilities of the universe are death and taxes, then clearly you won't be free of your tax bill just because you're retired. As long as you have income of any kind (and not just a paycheck), you'll also have income taxes to worry about. However, it's possible to reduce your income taxes in retirement -- and in some cases, you may be able to ditch your federal income tax bill altogether.

Tax-deferred versus Roth accounts

Retirement savings accounts come in two basic varieties. With tax-deferred retirement accounts, typically referred to as the "traditional" kind, you don't pay taxes on the money you put into the accounts, but you do pay taxes on the money when you take it out. With Roth accounts, you don't get a tax break on the money you put in, but because you've already paid the taxes on that money, your withdrawals are not taxed. Basically, tax-deferred accounts give you your tax break while you're still saving up, while Roth accounts give you your tax break when you're retired and living on those savings. So if you'd rather pay taxes now rather than when you're retired, consider investing through a Roth IRA or a Roth 401(k) if your employer offers one.

Check to IRS for 'all my money'

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Taxes on Social Security

Your Social Security benefits may or may not be taxable, depending on your overall income. In brief, if you file taxes as a single person and one-half of your Social Security benefits for the year plus your other taxable income is $25,000 or more, then your Social Security benefits will be partially taxable. If you're married and file jointly, the income limit is $32,000 instead of $25,000, but the rule is the same. If this combined income total hits or exceeds $34,000 (for singles) or $44,000 (for joint filers), then up to 85% of your Social Security benefits could be taxable. Clearly, keeping your taxable income low enough to avoid those two thresholds can save you quite a bit on taxes.

Other common retirement taxes

When you sell an investment that has gained value since you bought it, you're typically required to pay capital-gains taxes. The capital-gains tax rate varies depending on which tax bracket you're in for the year, but it's much lower than your ordinary income tax rate if you held the investment for more than a year before selling. Dividends you receive from your stock investments are also subject to tax.

The good news for retirees is that investments within any type of retirement account, whether tax-deferred or Roth, are immune from both capital-gains taxes and dividend taxes (with the possible exception of dividends classed as unrelated business taxable income -- but as long as you stick to ordinary stocks, you won't have to worry about those). However, if you have investments outside of your retirement accounts, dividends and capital gains will be taxed.

Putting it all together

To get the best possible tax deal during retirement, the ideal setup is a combination of tax-deferred and Roth accounts. Keeping your investments inside such accounts protects you from capital-gains and dividend taxes, having both kinds of accounts to draw on allows you to plan your distributions in a way that gets you the biggest possible tax break.

For example, let's say you're a single filer and you decide that you need to take $40,000 out of your retirement savings accounts this year. As of 2016, single filers aged 65 and up need to file a federal tax return if their taxable income was at least $11,900. So if you want to avoid federal income taxes altogether, you'd want to take just under $11,900 from your tax-deferred account (assuming that you have no other sources of taxable income and your RMD requirement allows you to do this) and take the rest of the $40,000 you need from your Roth account. If you're OK with paying a small federal income tax but want to avoid Social Security taxes, you'd take just under $25,000 from your tax-deferred account and turn to the Roth account for the remainder (with the same caveats as the previous sentence).

While you could just put everything into a Roth account, you'd then miss out entirely on the up-front tax break of a traditional retirement account, which could cost you more in taxes in the in the long run. One way to eat your cake and have it too is to convert your tax-deferred accounts to Roth accounts sometime before you retire. As long as you keep potential tax ramifications in mind during your retirement planning, you'll find you have plenty of ways to keep your hard-earned money out of the tax man's hands.

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