Having lots of retirement income is great, except when it results in a high tax bill. However, if you choose your sources of income correctly, you can maximize how much of that income you actually get to keep. Keeping yourself at or below the 15% income tax bracket will result in very low taxes -- and doing so is a lot easier than you'd think.

Taxable versus nontaxable income

Different sources of income are taxed in different ways. Finding nontaxable sources of income is the key to keeping yourself in a lower tax bracket.

Most retirees draw income from retirement savings accounts, Social Security benefits, and perhaps a part-time job or side gig. Of these different sources of income, wages are always taxed, while retirement savings distributions and Social Security benefits may or may not be taxed. Withdrawals from traditional IRAs and 401(k)s will be taxed, but withdrawals from the Roth versions of these accounts are completely tax-free.

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Social Security benefits may be taxable depending on how much taxable income you have from other sources. If your "combined income" -- meaning the sum of your adjusted gross income (which includes all your taxable income), your nontaxable interest, and one-half of your Social Security benefits -- exceeds a certain threshold ($25,000 for individual taxpayers or $32,000 for joint filers), then up to 85% of your Social Security money may be subject to tax. This can result in quite a high tax burden.

For example, a single taxpayer with $50,000 in taxable IRA distributions and a Social Security benefit of $1,500 per month would end up paying $3,825 in federal taxes on their benefits (and depending on where they live, they may owe state taxes on Social Security as well). The formula used to calculate the taxes on your Social Security benefits is quite complex, so the easiest way to figure out how much you'll be charged is to use a Social Security calculator.

Investments inside a retirement savings account are immune from capital gains taxes and dividend taxes, but investments in a standard brokerage account are not. Should you sell investments in an ordinary brokerage account and make money on the transaction, you could get hit with substantial capital gains taxes -- especially if you've been holding those investments for a long time and they've gone way up in value. However, if you only sell investments you've held for more than a year and keep your income tax bracket to 15% or below, your long-term capital gains tax rate will be zero. That's because capital gains on investments held for more than a year are subject to a lower tax rate than those that were sold within a year of purchase -- and investors who are in or below the 15% income tax bracket enjoy a long-term capital gains tax rate of 0%.

A low-tax plan for retirees

As you can see, keeping your combined income below $25,000 a year (or $32,000 if you're married and file a joint return) may save you a substantial amount of money. Not only will you have a relatively small income tax bill, but you can keep your Social Security benefits from being taxed at all. Plus, keeping your taxable income low enoughwill also put you in or below the 15% income tax bracket regardless of your filing status (for 2018, the 15% tax bracket tops out at $38,700 for single filers, $51,850 for heads of household, and $77,400 for married couples filing jointly). That means you won't have to worry about long-term capital gains taxes, either.

The easiest way to create a source of nontaxable income is to save through a Roth IRA. If a substantial portion of your retirement savings is in such an account, while the rest is in a traditional tax-deferred retirement account, then you can make your retirement withdrawals strategically so that you stay under that $25,000/$32,000 combined income limit. For instance, if the taxpayer in the earlier example had taken $15,000 from a traditional IRA and the remaining $35,000 from a Roth IRA instead of pulling it all from the tax-deferred account, they could have completely avoided that Social Security tax bill. That would have saved not only the $3,825 tax bill on their Social Security benefits, but also thousands of dollars in taxes on the remaining income.

What if you don't have a Roth account?

If you're retired or nearly retired, and all your money is in a traditional IRA or 401(k), you can still reduce your taxes in retirement by doing a Roth conversion. That means taking some of the money in your tax-deferred retirement savings accounts and moving it to a Roth account instead. However, be warned: The year that you do a Roth conversion, you'll have to pay income taxes on the money you moved into the Roth account. If you have a lot of money to move, it's a good idea to spread your conversion out over several years. Paying so much in taxes can be a bitter pill to swallow, but at least once you're done, you'll be able to control your taxes for the rest of your life.

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