While you are still working, much of what you owe in your taxes in any given year is preordained by your salary. Sure, you might have room to lower your tax bill by making tax-deductible IRA and 401(k) contributions, for example, or deducting your mortgage interest. But the size of your paycheck is by far the biggest determinant of the taxes you owe on a year-to-year basis.

Taxes are different in retirement. If you are no longer earning a paycheck, the taxes you will owe will depend on your spending and where you draw your cash from: Social Security, your IRAs, a pension, and so on. Of course, you lose a bit of control over your tax bill once required minimum distributions from traditional retirement accounts commence at age 70 1/2. But it is safe to say that retirees exert more control over their tax bills than do working people.

Here are 10 of the key ways that retirees can reduce their tax bills in retirement.

1. Practice tax diversification in your accumulation years.
This one will not help you if you are already retired. But if you are still working—even if you only have five or 10 years to go—one of the best ways you can reduce your in-retirement tax bills is to make sure that your retirement accounts are spread across multiple silos: traditional tax-deferred, Roth, and taxable (nonretirement accounts). True, you can often earn a deduction on contributions to tax-deferred accounts, making traditional IRAs and 401(k)s a (relatively) painless way to amass retirement assets. But those assets are taxed at your ordinary income tax rate when you pull money out in retirement, and you will also be subject to mandatory distributions after age 70 1/2. By contrast, qualified Roth withdrawals will be tax-free and securities sold from taxable accounts are eligible for long-term capital gains treatment.

2. Take advantage of the “sweet spot.”
Did not prioritize tax diversification in your working years? Do not dismay. New retirees can take advantage of the “sweet spot” of retirement planning: the years between the start of retirement and when required minimum distributions commence post-age 70 1/2. These early retirement years can be an ideal time to convert traditional IRAs to Roth because retirees have more control over their taxable income in those years. New retirees expecting their tax bills to escalate once RMDs commence might also consider spending from their RMD-subject accounts in the early retirement years. In addition to reducing their balances that will eventually be subject to RMDs, such a strategy could enable them to delay Social Security filing, enlarging their benefits along the way.

3. Manage withdrawal sequencing.
Of course, the preceding strategy will not make sense in every situation. In fact, the conventional wisdom on in-retirement withdrawal sequencing is that retirees should save the accounts with the potential for tax-deferred or tax-free compounding until later in the distribution queue, while spending first from taxable accounts, where income and gains are taxed in the year in which they are realized. This is complicated stuff, and the right place to go for withdrawals may well vary from year to year of your retirement. If you are not comfortable with the ins and outs of the tax treatment of retirement withdrawals, consult with a tax-savvy financial advisor or an investment-savvy tax advisor.

4. Keep an eye on asset location.
In addition to sequencing your withdrawals in an effort to reduce your tax bill, it is also wise to keep an eye on which assets you house in which accounts. Securities that kick off a high level of taxable income, such as bonds and REITs, are best housed in your tax-sheltered accounts, so you will not have to pay taxes on those income distributions unless you are withdrawing them. Meanwhile, broad-market equity index funds (whether traditional mutual funds or ETFs) and municipal bond funds are a good fit for taxable accounts.

5. Do not rule out additional contributions.
Some retirees might assume that additional contributions to retirement accounts are off-limits once they quit full-time work, but that is not so. While contributions to traditional IRAs are off limits once you pass age 70 1/2, you can still contribute to a Roth IRA, as long as you have enough earned income to cover the contribution amount. (Some retirees pick up part-time work or consulting gigs for this very reason.) Alternatively, for couples where one partner is working and the other is not, it is possible for the partner with earnings to make contributions to an IRA for the nonearning spouse. The major caveat is that the earning spouse must have enough income to cover the contribution amount. Roth IRA contributions later in life can be particularly beneficial for individuals or couples who do not expect to need all of their IRAs during their own lifetimes but rather intend to pass that money to their heirs.

6. Know the rules on Social Security taxation.
Social Security benefits were first taxed beginning in 1984, and the taxation of benefits was expanded a decade later. Today, roughly half of all families receiving Social Security benefits will pay at least some tax on their benefits, according to the Social Security Administration, and that percentage is expected to rise over the next 35 years. Moreover, some states tax Social Security benefits as well. Managing the taxation of Social Security is so tricky that many retirement planners do not even bother with it, however retirees should stay attuned to the possibility that tax on Social Security benefits could boost their marginal tax rates

7. Get the biggest bang for your deductions.
On the other side of the ledger, you can manage your deductions—for healthcare outlays, property tax, mortgage interest, and charitable contributions, to name just a few—in an effort to reduce your tax bill. (Note that 2016 was the last tax year for which the 7.5% threshold applied for deductible healthcare expenses for people over age 65; for 2017, only medical expenses in excess of 10% of AGI will be deductible, regardless of the taxpayer’s age.) Because they do not necessarily have sufficient deductions to make itemizing more beneficial than taking the standard deduction in each tax year, some retirees “bunch” their deductions to amass deductions in excess of the standard deduction.

8. Look for ways to reduce your property tax bill.
Forget taxes: Property tax bills can be one of the biggest bills, period, that many retiree households face. That is one reason many retirees prioritize low-tax communities when deciding whether and where to relocate in retirement. Of course, relocation is not for everyone: It is a fact of life that large urban centers, which many retirees prefer for cultural or family reasons, feature high property taxes. But you may be able to take advantage of senior-related or other tax breaks for homeowners.

9. Be generous.
Charitable giving can deliver a sense of well-being, as well as a tax break: You will be able to deduct the amount of your contribution, up to 50% of your adjusted gross income, to most charities. Retirees who are subject to required minimum distributions can also take advantage of what is called a qualified charitable distribution, which can often deliver a bigger bang for your tax buck than donating to charity and deducting. Alternatively, retirees with highly appreciated assets in their taxable accounts can donate securities directly to charity; the retiree gets the tax burden of the appreciation off her books and the charity will not owe taxes on the gain, either. (A donor-advised fund can work well in such instances, too.)

10. Play the long game.
Finally, even as you aim to reduce taxes in the here and now, it is also worth considering the tax ramifications of any assets that you will leave behind when you are gone. As noted above, Roth IRAs can be among the best assets for your heirs to inherit; they will pay no income taxes on Roths that they inherit from you, though estate taxes may apply. Highly appreciated assets that you hold in your taxable account can also be sensible assets to earmark for heirs; any taxes due upon sale will be based on the price of the asset (or account) on the date of your death, not your own cost basis. A qualified estate-planning attorney can help you craft a sensible plan to reduce the taxes due during your lifetime as well as your loved ones’.


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Tags: Taxes, Retirees