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If you’re fortunate enough to make it to retirement, count yourself among the lucky. If you’re savvy enough to save and invest for retirement, count yourself among the wise. And if you plan for all retirement-related expenses — including taxes — count yourself among the brilliant. Every day, some retirees pay too much in taxes. Here are four ways they allow it to happen.
1. They believe that one investment is as good as another
If you were to pick five different retirement investments out of a hat, you would probably find that they’re not all taxed the same. For example, municipal bonds are never taxed at the federal level (which can save you big bucks in retirement).
While ordinary dividends are taxed at the ordinary capital gains rate, some qualified dividends are taxed at a lower capital gains rate. And if you made after-tax contributions to a Roth IRA, you’re not hit with taxes on that money in retirement.
It’s all about keeping enough money in your bank account to cover your monthly budget.
If you’re concerned about how your investments will be taxed, speak with a financial advisor about minimizing your tax exposure throughout your golden years.
2. They keep doing taxes the same old way
By the time you’ve retired, you’ve probably been filling out an annual tax return for decades and can do it in your sleep. Unless you’re working with a professional tax preparer or using tax software that walks you through the steps, it’s possible to overlook some pretty sweet tax breaks available to older taxpayers.
For example, did you know that once you turn 65, the IRS provides a larger standard deduction? For 2023, the standard deduction for a typical single taxpayer is $13,850. But if you’re 65 or older, you get to claim $15,700. That’s an increase of $1,850.
3. They want to take advantage of the higher tax deduction — a little too much
Even when you’re retired, you may still benefit by itemizing your deductions rather than taking the standard deduction. This is especially true if you’ve spent a lot on medical care. If your medical expenses exceed 7.5% of your adjusted gross income (AGI) and you choose to itemize, many of your expenses will be deductible. Deductions include (but are not limited to):
- Medicare premiums
- Transportation for essential medical care
- Hospitalization
- Prescription drugs
- Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
- Inpatient treatment for alcohol or drug addiction
- Amounts paid for false teeth, reading or prescription eyeglasses, contact lenses, hearing aids, a guide dog or other service animal to help a visually impaired or hearing disabled person, or a person with other physical disabilities, crutches, or wheelchairs
- Weight-loss programs for specific medical issues, including obesity
- Long-term care insurance premiums
- Nursing home care
As an example, if you have an AGI of $50,000, you would need a total of $3,750 or more in medical expenses to qualify for the deduction.
4. They automatically stop working
Unless you’re ready to retire, there’s no reason to stop doing something you enjoy, especially if you’re self-employed. Let’s say you groom dogs, create (and sell) artwork, or work as a consultant. Doing so may help ease you into your retirement years while also providing tax breaks. Here are two of those breaks:
- If you’re still employed (which you are if you’re self-employed), you are eligible to contribute to a Solo 401(k). Contributions are made pre-tax, meaning you won’t have to pay taxes on the money you contribute until you begin withdrawing it from your retirement account. Depending on how much your small business earns, you can contribute up to $73,500 in pre-tax dollars (as long as you’re over 50).
- If you’re married but still working, your spouse can contribute to a spousal IRA in their own name. The IRS contribution limit for a spousal IRS this year is $6,500. In 2024, it will be $7,000.
Paying taxes may be required, but there’s no reason to pay more than absolutely necessary.
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