Many retirees find themselves financially stressed once their careers come to an end, and it's easy to see why. First, as a retiree, you've given up the paycheck you once relied on for income. And you may now be living on less money than you were while you were working.
Also, a lot of the expenses you incur in retirement are ones you can't control. If your health starts to fail, you'll risk getting stuck with expensive medical bills. And if your home needs repairs, you may have no choice but to shell out the money for fixes.
Image source: Getty Images.
Taxes are another thing you can't control, to some degree. The IRS isn't going to magically let you off the hook from paying taxes just because you're retired.
However, there are steps you can take to pay the IRS less as a retiree. Here are some tactics worth exploring.
1. Save in a Roth IRA
A Roth IRA won't give you an up-front tax break on your contributions, but come retirement, withdrawals from a Roth IRA will be yours to enjoy tax-free. That alone could help alleviate a world of financial stress.
If your income is too high at present to contribute to a Roth IRA directly, you can always put money into a traditional IRA and then convert it after the fact. You might face a large tax bill on that conversion, though, so it's best to consult with a financial or tax professional if this is a route you're interested in.
2. Use your HSA for medical expenses only
If you've been funding a health savings account (HSA) and reserving that money for retirement, good for you. A lot of people tap their HSAs regularly to cover near-term bills. But letting that money grow and carrying it into retirement could be instrumental in helping you cover your senior medical expenses with relative ease.
If you're under 65, you'll face large penalties for taking HSA withdrawals for non-medical purposes. Once you turn 65, however, those penalties are waived.
Non-medical withdrawals from an HSA are subject to taxes. If you want to avoid those, try to reserve your HSA for medical bills only.
3. Load up on municipal bonds for income
Retirees often turn to bonds as an income source because they tend to be fairly stable (at least compared to stocks) and often pay interest on a predictable schedule. But if you're worried about owing a lot of money in taxes as a retiree, then it pays to favor municipal bonds.
The interest income you receive from your municipal bonds is exempt from federal taxes. If you buy municipal bonds that are issued by your home state, you can avoid state and local taxes, as well.
Municipal bonds might pay less interest than corporate bonds with taxable interest. So you'll need to run the numbers to see what makes the most financial sense, assuming you're interested in maintaining a bond portfolio for income as a retiree.
Don't lose sleep over taxes
It's natural to worry about taxes at any stage of life, including retirement. The IRS isn't about to just go away, but there are steps you can take to shield more of your income from taxes -- in the near term, as well as in retirement. There may be strategies you can employ beyond the three suggestions above, so it's a good idea to consult with a financial or tax advisor ahead of retirement and see what they recommend for you.
