If you're a Baby Boomer, you were born between 1946 and 1964 -- and you're either in, or not that far away from, retirement. In order to maximize their retirement nest eggs, folks in their 50s and 60s should make some smart tax moves.
Here are three smart tax moves for Baby Boomers:
1. Make the most of retirement accounts
If you're only saving for retirement through a bank account and a regular brokerage account, you're likely shortchanging yourself. There are a bunch of tax-advantaged retirement accounts you should make the most of -- such as IRAs and 401(k)s -- while you're still working and able to.
There are two main kinds of IRAs -- the traditional IRA and the Roth IRA. With a traditional IRA, you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $75,000 and a $5,000 contribution? Your taxable income for the year will drop to $70,000, saving you money upfront.) The money grows in your IRA and will be taxed at your ordinary income-tax rate when you withdraw it in retirement.
With a Roth IRA, you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. (Taxable income of $75,000 and a $5,000 contribution? Your taxable income remains $75,000 for the year.) The beauty of the Roth IRA, though, is that your money grows in it until you withdraw it in retirement -- tax free. IRA contribution limits for both the 2015 and 2016 tax years are the same: $5,500. There's also an extra $1,000 "catch-up" contribution permitted for those aged 50 or older (i.e., Baby Boomers), letting them contribute as much as $6,500 for the year.
For 401(k) plans, there are much-fatter contribution limits. For the 2015 and 2016 tax years, they're $18,000 for most people, plus $6,000 for those 50 and older. A 401(k) plan will typically offer a limited menu of investment options for your money, but there's likely a simple index fund or two among them. A key benefit of 401(k) accounts is that they often feature matching funds contributed by your employer. That's free money, so be sure to contribute at least enough to max that out.
2. Minimize capital gains tax
When you sell stocks and other assets, you face capital gains taxes. Short-term gains, from assets held a year or less, are taxed at your ordinary income-tax rate. Long-term gains are taxed at 15% for most people, and more for high earners. If you're in the 10% or 15% tax bracket, though, your long-term capital-gains tax rate is zero.
Keep those factors in mind, because once you're retired, your income might fall significantly, and you might find yourself in a lower tax bracket. By waiting to sell some appreciated assets until you're in a lower bracket, you may be able to pay a lower tax rate -- or no tax at all -- on your gains. Just be sure that waiting is a reasonable thing to do. If you plan to sell out of a stock because you've lost faith in it, for example, it's probably best to just sell and not wait to do so.
3. Reap tax breaks as your medical expenses rise
Finally, as you get older, you're likely to see your medical expenses increase -- due to more visits to doctors, occasional surgeries or procedures, new prescriptions, and so on. You may need hearing aids at some point, too, and eventually even a wheelchair. These are the kinds of expenses that can add up. And if you have enough of them, you may get a tax deduction for them.
Once you total your qualifying expenses, see what portion of that total exceeds 10% of your adjusted gross income (your "AGI"). If your qualifying medical expenses total $7,500, for example, and your AGI is $60,000, the 10% threshold would be $6,000. Thus, you can deduct the portion of your expenses over that, or $1,500.
Note that the threshold was recently raised to 10%. For those aged 65 or older, though, it remains at its previous level of 7.5% through December 31, 2016. Keep this tax break in mind as you get older and face higher healthcare expenses.
With retirement looming, or having started not so long ago, it's more important than ever to be savvy about your money management, as your nest egg will likely need to last for the rest of your life.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.