While tax strategies should always be tailored to your unique situation, the concepts below often help retirees save money.
- Max out contributions to tax-advantaged accounts.
- Understand required minimum distributions.
- Take proportional withdrawals.
- Learn about taxes on Social Security benefits.
- Consider a partial Roth conversion.
1. Max out contributions to tax-advantaged accounts
What you should do. If you haven’t been maxing out your contributions to tax-advantaged retirement accounts—in 2021, that’s $19,500 to 401(k)s and 403(b)s; $7,000 to IRAs—now is the time to start. If you’re 50 or older, take advantage of catch-up contributions: $6,500 for 401(k) and 403(b) plans and $1,000 for IRAs.
How this strategy saves on taxes. Contributions to most retirement accounts reduce your taxable income now. Contributions to Roth accounts reduce your taxable income later. Contributions to either account, when invested, grow tax deferred. That means you don’t get a tax bill every year if your account increases in value.
Bonus tip: Hedge your bets about future tax rates by contributing to both a 401(k) or traditional IRA and a Roth 401(k) or Roth IRA. The two account types get opposite tax treatment when you take withdrawals.
Keep reading for the next tip.