4 Yearlong Tax Tips for Retirees

Whether you’re just easing out of the workforce or you’ve been in retirement for a few years now, making the right financial moves is critical. One central goal during retirement is protecting your wealth from unnecessary taxes. 

In many cases, there are ways to avoid owing more taxes - but usually, this requires proactive action beyond tax season. Below we’ll explain four tips you can utilize throughout the year to help minimize your tax obligations in retirement.

Tip #1: Take Your Required Minimum Distributions (RMDs)

An RMD is an amount that must be withdrawn from your retirement account. These required withdrawals begin when you, the retirement plan account owner, reach age 72. The rules apply to employer-sponsored retirement plans, traditional IRA plans and Roth 401(k) accounts, but they don’t apply to Roth IRAs when the account owner is still alive. 

Some IRA custodians and retirement plan administrators might find out what your RMD is for you, but the responsibility ultimately falls on you. To find out what your RMD is, the IRS provides life expectancy tables to utilize according to your circumstances. If you do not withdraw the RMD (or the correct amount), the amount not withdrawn will be taxed at 50 percent, which is why it’s critical to take your RMDs and withdraw the correct amount.¹ 

Tip #2: Manage Your Income Combinations 

As a retiree, a portion of your income will likely come from Social Security. However, not all of your benefits are taxable, and there are ways to minimize or, at times, eliminate taxes on your Social Security benefits. 

If half of your Social Security benefits in addition to your other income is higher than the base amount for your status, your benefits will be taxable. By strategically managing all of your income sources (such as pension payments, dividends or part-time jobs), it’s possible to lower the portion of benefits that will be taxed. Rules regarding Social Security income taxes also vary from state to state, so it is also helpful to check with your state regulations.²

Tip #3: Figure Out if You Need to Pay Quarterly Taxes (If Not, You May Decide to do it Anyway) 

If you don’t have taxes withheld automatically, you may need to pay estimated tax payments. Individuals who are expected to owe $1,000 or more - or those whose withholding and refundable credits are 1) less than 90 percent of the tax owed or 2) at least 100 percent of the tax on the previous year’s return - must pay estimated tax. 

In some cases, you might decide to pay quarterly taxes, even if you are not required to, in an effort to avoid the inconvenience of paying a large sum all at once. If you miss a payment or underpay, you may be charged a penalty.³

Tip #4: If You’re Moving to a New State, Get to Know Its Tax Laws

If you’re relocating to a new state during retirement, consider the impact of the move on your financial situation, as tax laws vary according to the state. For example, some states, like Florida and New Hampshire, don’t tax on income or only tax on dividends and interest.⁴ On the other hand, they may have higher property taxes. For example, New Hampshire’s property taxes are high compared to the rest of the country.⁵  In addition to nicer weather or a more serene lifestyle, you might decide to move to a new state in an effort to save on taxes. 

In many cases, an individual or couple is working with a fixed amount of wealth to last throughout retirement, which is why taking the right financial steps is essential. By working with an advisor and keeping these four tips in mind during the year, you can make sure you’re not paying more than you need to. When it comes time to finalize gifting to your children or grandchildren, you can further reduce taxes by incorporating other strategies, like charitable giving, into the equation.⁶ 

Spiritual Application

It is important to be aware of how much we are spending in taxes when we manage our finances. Taxes become an ever-increasing part of the financial planning process as the time in retirement increases. From a numbers standpoint, $1 saved in taxes can actually be greater than a dollar made in an non-IRA investment account due to the taxes owed on the investment gains. "A penny saved is a penny earned" is truly the wisdom deployed here. 

Proverbs 8:20-21(NKJV) states: "I traverse the way of righteousness, in the midst of the paths of justice, that I may cause those who love me to inherit wealth, that I may fill their treasuries." I love the cause and effect of this passage. Although wealth is the eventual reward, righteousness and justice are the main motivations that lead to the end result of wealth. How many times do we seek wealth and riches as the first priority, only to see our own plans fail to produce what we originally intended them to. It is such a simple concept to seek God for the direction he would have us to go, versus setting our own plans into motivation without regard. No doubt Solomon's wisdom was manifested here as he wrote this verse even in light of so much self-motivation and self-gain that was prevalent at this time.

I think we can even take this one step further and actually apply the riches that we are blessed with other stewardship practices. Giving to those less fortunate, contributing to charitable causes, tithing, and multiple other areas. I believe that the more we are blessed, the more we can be a blessing to others. 

Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including Young Professionals, Current and Future Retirees and Church Staff Members.