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Many expenses are stressful for retirees. Health care is important because it can significantly reduce income. The same goes for housing. But an expense that really tends to take the elderly unprepared is none other than taxes.
This is a common misconception that when it comes to paying taxes, retirees are largely drawn from the case. Not so. Seniors are required to pay taxes on withdrawals from traditional retirement plans, pension income (most of the time) and earnings from part-time work, among others.
If you are worried about paying taxes in retirement, you can do several things to reduce this burden and further protect your income from the IRS. Here are three to start.
SOURCE OF IMAGE: GETTY IMAGES.
1. Save in a Roth IRA or 401 (k)
Traditional IRAs and 401 (k) offer immediate tax relief for contributions because they are funded with pre-tax dollars. The Roth IRAs and the 401 (k), on the other hand, do not do this.
But while traditional IRA and 401 (k) withdrawals are taxed at retirement, withdrawals from Roth plans are tax-free, which means that by waiving tax relief In advance, you buy yourself the opportunity to pay less tax in the future. This is a particularly good measure if you think your retirement will be higher today (for example, because you are saving a lot of money).
2. Charge on municipal bonds
Bonds are generally considered a good investment for seniors because they are less volatile than equities. But bonds come in different forms and, from a tax point of view, it is advantageous to focus on municipal bonds.
Municipal bonds are those issued by cities, states and counties. They work the same way as corporate bonds: you invest a certain amount of money, you agree to lend it to the issuer over a predetermined period and you collect semi-annual interest payments until your obligations are met. expire and your principal is repaid. These interest payments twice a year can provide a solid source of income in retirement, but as in most forms of income, the IRS is entitled to a share of this money if it is collected from issuers corporate bonds. The advantage of buying municipal bonds is that their interests are always exempt from federal taxes. If you buy bonds issued by your country of origin, you will not pay any local or local taxes.
3. Switch to a state that does not tax social security
Low-income seniors can often avoid federal taxes on their social security benefits, while benefits for middle- to upper-income seniors are often subject to federal taxes to some extent. But it's not just the federal government that can impose these benefits. Some states also tax them, so moving to a place where it does not happen can help you avoid losing money.
Currently, 13 states impose social security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
Most of these states offer an exemption that allows low- and even middle-income households to pay their taxes. But Minnesota, North Dakota, Vermont and West Virginia offer no exemption.
Of course, you should not just pack your bags and move to a state that does not tax social security before knowing the cost of living in that country. In some cases, it is worth losing some of your benefits at the expense of taxes if it means benefiting from cheaper rent, goods, and services locally. But from a strictly fiscal point of view, living outside the 13 states mentioned above is a good way to reduce the tax burden on your retirement.
Taxes are a drag on all stages of life, including retirement. If you want to avoid paying them as a senior, keep your savings in a Roth account, prefer municipal bonds over corporate bonds and choose your home country with care. With a little luck, it will be the turn to keep the collector of your money.
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