Taxes can frankly be a real pain at any time in life. But you may find that they're even more of a problem once you enter retirement.
Many seniors experience a drop in income once they enter retirement. That could make any tax bill you face quite stressful.
As such, it's a good idea to do what you can ahead of time to minimize your tax burden as a retiree. These moves could help you do just that.
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1. Save in a Roth IRA or 401(k)
The major downside to funding a Roth IRA or 401(k) is that your contributions won't result in an immediate tax break. But it may be worth it to forgo that perk to get the benefit of tax-free withdrawals later in life.
As a senior, you may find that the withdrawals you take from your retirement savings are your largest source of monthly income. If you save in a Roth account, taxes on those withdrawals won't apply. And, as an added plus, those withdrawals won't count as income when determining whether you're required to pay taxes on a portion of your Social Security benefits.
Many seniors are surprised to learn that Social Security has the potential to be taxable. But you might get out of those taxes if your non-Social Security income isn't very high. Since Roth withdrawals aren't included in that calculation, you might have minimal income to report outside of Social Security, thereby getting you off the hook from taxes.
2. Contribute to an HSA and leave it alone
If your health insurance plan is compatible with a health savings account (HSA), it pays to not only contribute to one of these accounts, but pledge to leave your balance untouched until retirement. There's no rule requiring you to spend down your HSA balance from one year to the next. And funds you don't withdraw can be invested in a tax-advantaged manner.
Just as importantly, HSA withdrawals taken for qualified medical expenses are not taxable. And chances are, in retirement, you're going to have a lot of healthcare bills to contend with. If you go into retirement with a nice HSA balance, that's yet another income source the IRS can't touch (provided your withdrawals are limited to medical expenses only).
3. Invest in municipal bonds
Bonds are a great investment for retirees because they tend to be fairly stable and can generate steady income. Municipal bonds are a particularly great choice if you want to collect those interest payments without owing more in federal taxes.
Not only is municipal bond interest tax-exempt at the federal level, it could also be tax-exempt at the state or local level if you buy bonds issued by your state of residence. Just know that selling municipal bonds at a gain will result in a tax bill, since that's outside the realm of interest income.
Retirement can be a stressful period, financially speaking. If you save in the right accounts and choose the right investments, though, then you might manage to pay the IRS less -- and keep more of your money for yourself.
