Taxes are a part of life throughout your life. And they unfortunately do not go away in retirement -- though wouldn't it be nice if that were the case?
Worse yet, taxes have the potential to be even more stressful later in life once you're on a fixed income. That's why it pays to do what you can to minimize your retirement tax bill. And that could boil down to choosing the right accounts and the right investments. Here are three specific moves that could leave you paying the IRS might less money once your career has come to an end.
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1. Save in a Roth IRA
You won't get an up-front tax break with a Roth IRA the same way you will with a traditional IRA. But in exchange, you'll enjoy tax-free investment gains in your account as well as tax-free retirement withdrawals. That's huge.
Now your savings may not be the only income source available to you in retirement. You may also be looking forward to getting Social Security.
If you have income on top of Social Security, those benefits may be taxed depending on your total income picture. But Roth IRA withdrawals don't count as income for the purpose of determining whether you'll pay taxes on Social Security or not. So that's a secondary but important reason to house your nest egg in a Roth IRA.
2. Fund an HSA
Healthcare might end up being one of your largest expenses in retirement. So it's important to set funds aside to pay for it.
If you take withdrawals from a traditional IRA or 401(k) plan to cover healthcare expenses, you'll face taxes on those distributions. But if you make a point to save in an HSA, you'll have a source of tax-free income at your disposal that you can use for medical expenses.
What makes HSAs especially great is that they're triple tax-advantaged. With a Roth IRA, you get tax-free investment gains and withdrawals, but there's no tax break on your contributions. With an HSA, you get a tax break on the money you put in on top of tax-free gains and withdrawals for qualified healthcare expenses.
3. Invest in municipal bonds
It's a good idea to set yourself up with retirement investments that pay you on a consistent basis. But some of those investments, like dividend stocks, have the potential to add to your tax burden.
That's why it could pay to load up on municipal bonds. The nice thing about municipal bonds is that they can serve as a steady source of income. But more so than that, municipal bond interest is never subject to federal taxes. You can also avoid state and local taxes on your municipal bonds if you buy bonds issued by your state of residence.
Nobody wants to pay the IRS more money than necessary. And at a time in life when money might get tight, it pays to do everything within your power to lose as little income as possible to taxes. With these key moves, you can set yourself up to worry less about taxes as a retiree -- and keep more of your money for yourself.
