3 ways to legally avoid paying taxes in retirement



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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.

<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "1. Save in a Roth IRA or Roth 401 (k)"data-reactid =" 12 ">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.

Older man with gray hair leaning against a tree

Source of the image: Getty Images.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If your company proposes a 401 (k) plan with a Roth Savings Functionyou can register whatever your salary. Roth IRA, on the other hand, prohibit senior employees from making direct contributions, but if your the income is too high to finance a Roth IRA directly, you can instead put money into a traditional IRA, and then convert to a Roth after the fact. "data-reactid =" 27 "> If your company offers a 401 (k) plan with a Roth savings feature, you can register regardless of your salary Roth IRA, on the other hand, prohibits high-income earners from making direct contributions but if your income is too high to finance a Roth IRA directly, you can put money into a traditional IRA and then convert it to Roth afterwards.

<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "2. Invest in municipal bonds"data-reactid =" 28 ">2. Invest in municipal bonds

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "It is generally recommended that older people turn to more conservative investments as we get older, which usually means choosing bonds over shares (although it's always a good idea to hold on to some shares during retirement). If you intend to accumulate bonds, choose municipal bonds more than corporate bonds is a good way to keep 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. Interest on corporate bonds, on the other hand, is still taxable. Data-reactid = "29"> It is generally advisable for older people to choose more conservative investments as they get older, which usually means that bonds are preferable to stocks (although it is still good idea, hang on 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.

<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "3. Hold investments for at least a year and a day"data-reactid =" 30 ">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. .

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Good Tax rate on long-term capital gains can change from year to year, in 2019 you will not pay anything if you earn less than $ 39,375 as a single filer. And if your income is greater than $ 39,375 but less than $ 434,550, you will only pay 15% on long-term capital gains, which is much less than you will pay in income taxes for income the highest. data-reactid = "33"> Although long-term capital gains tax rates may change from year to year, in 2019 you will not pay anything if you earn less than $ 39,375 in as a sole declarant. And if your income is over 39,375 USD. but with less than $ 434,550, you will pay only 15% on long-term capital gains, which is far less than you would pay in income taxes for the highest income.

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.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " More from The Motley Fool "data-reactid =" 35 "> More from The Motley Fool

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The Motley Fool has a disclosure policy."data-reactid =" 43 ">Motley Fool has a disclosure policy.

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