• 3-Minute Article
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  • Jun 15, 2017

How to Help Minimize Taxes in Retirement

Five strategies to help you reduce retirement taxes.

Questions this article can help you answer:
  • How can I help reduce my taxes in retirement?
  • How are annuity and life insurance products taxed?
  • What options do I have to help diversify my retirement portfolio?

It’s important to keep tax implications in mind when investing in your retirement. You can help minimize the investment taxes due on your retirement savings by opting for tax-advantaged accounts.

Consider incorporating one or more of the following tips into your retirement strategy to help keep your money invested.


1. Maximize Contributions to Tax-Advantaged Retirement Accounts

Retirement accounts such as individual retirement accounts (IRAs) and 401(k) plans offer two key tax benefits:

  • They may reduce your current tax bill
    • IRA contributions can be made pre-tax (subject to certain limits)
    • 401(k) contributions are generally made with pre-tax income
  • The money you contribute grows tax-deferred, although you will owe ordinary income tax on withdrawals

Account 2024 Contribution Limit1
401(k) $23,000
$30,500 for people ages 50+
IRA $7,000
$7,500 for people ages 50+

Source: 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000. IRS, November 1, 2023.


2. Diversify Your Retirement Accounts

Holding a variety of investment accounts lets you mix and match income sources and could help minimize taxes in retirement. For example, a Roth IRA funded with after-tax contributions may complement traditional IRAs and 401(k) plans by providing tax-free qualified distributions in retirement so long as certain requirements are met. Working with a financial professional as well as a tax professional can help you decide the best strategies for your specific needs. Taxable investment accounts like regular brokerage accounts can also be used for retirement income. When you sell investments that you’ve owned for at least one year from these accounts, the proceeds are taxed at the 0-20% capital gains tax rate.2 For many people, this is lower than the income tax rate they pay on income from other sources, which can be as high as 37%.


3. Consider Annuities and Life Insurance Products

If you’ve maximized your IRA and 401(k) contributions, you may want to consider making tax-efficient investments through annuities and some types of life insurance.

  • Deferred annuities are tax-deferred, meaning you will only be taxed on the growth when you take money out in the future
  • Some life insurance policies, while offering a death benefit, may also offer tax-free growth and tax-advantaged withdrawals on the plan’s cash value


4. Choose Tax-Efficient Investments

Certain investments also carry tax benefits. For example, income earned from most municipal bonds is tax-free at the federal level and, in some cases, at the state and local levels. You should talk with a financial professional about that investment and others, including tax-managed mutual funds, the managers of which actively structure their portfolios for tax efficiency.


5. Maintain a Long-Term Perspective

Investing your money with the future in mind is key – and so is sticking to your plan despite the stock market’s ups and downs. Choosing to adjust your investment mix based on current market conditions, whether good or bad, could increase your tax bill.

For example, gains realized on stocks held for less than a year are generally taxed at ordinary income tax rates – which max out at 37% – rather than taxed at the 0-20% long-term capital gains tax rate.

Every dollar you pay in taxes reduces your returns. Diversifying your portfolio and sticking to your long-term plan for retirement can put you in a better position to save money. Talk with a financial professional about the role tax-advantaged investments could play in your portfolio.


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