3 ways to legally avoid paying taxes in retirement – The Fool Motley

Let's face it: taxes are a drag on every moment of life. But in retirement, they can be a major constraint on your limited financial resources. As such, it is helpful to find ways to reduce your tax burden as a senior. Here are three ways to do it.

1. Save in a Roth IRA or Roth 401 (k)

ARIs and 401 (k) s come in two main varieties: traditional and Roth. In the first case, contributions are tax-free and workers receive immediate tax relief to finance their accounts. Retirement withdrawals are, however, taxable.

Roth accounts work the opposite way: contributions are made with after-tax dollars, so there is no immediate benefit to financing an account. Withdrawals, on the other hand, are tax deductible in retirement, which helps reduce your taxes at a point in life where you could really use that flexibility.

If your company offers a 401 (k) plan with a Roth Savings feature, you can sign up regardless of your salary. The Roth IRAs, on the other hand, prohibit high earners from making direct contributions, but if your income is too high to directly finance a Roth IRA, you can place money in a traditional IRA and then convert it to Roth. afterwards.

2. Invest in municipal bonds

Seniors are generally advised to choose more conservative investments as they age, which usually involves choosing bonds over shares (although it is always a good idea to stick to some shares during retirement). If you intend to accumulate bonds, go for municipal bonds instead of corporate bonds. This is a good way to reduce your taxes to a minimum. Indeed, the interest you collect on municipal bonds is still exempt from federal taxes and if you buy municipal bonds issued by your country of origin, you will also avoid national and local taxes. On the other hand, corporate bond interest is still taxable.

3. Hold investments for at least a year and a day

Whenever you sell an investment at a price higher than the one you paid, you are liable for the capital gains tax. But the time you hold this investment before unloading it can dictate the amount of tax you pay to sell it for profit.

Investments held for one year or less are in the short-term capital gains category, and the taxes you pay on short-term gains mimic those you pay with your ordinary income. On the other hand, if you keep your investments for at least a year and a day, you will be propelled into the long-term capital gains category and you will benefit from the lower tax rates associated with them. .

Although the long-term capital gains tax rates may vary from year to year, in 2019 you will not pay anything if you earn less than $ 39,375 as a taxfiler. unique. And if your income is greater than $ 39,375 but less than $ 434,550, you will pay only 15% on long-term capital gains, which is far less than you will pay in income taxes for income the highest.

The less tax you have to pay in retirement, the more money you will have to pay your bills and enjoy your life. So, think about how you could reduce your tax burden as a senior well before this milestone arrives, so that once it's done, you'll be well positioned to keep more of your income from the IRS.