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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.
Senior man holding his head while examining the document
SOURCE OF IMAGE: GETTY IMAGES.
<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 401 (k)"data-reactid =" 26 ">1. Save in a Roth IRA or 401 (k)
<p class = "canvas-atom-text-canvas Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Traditional IRAs and 401 (k) offer tax relief for contributions, as they are funded with pre-tax dollars. Roth IRA and the 401 (k) s, on the other hand, do not do it. "data-reactid =" 27 "> Traditional IRAs and 401 (k) s offer immediate tax relief for contributions, as they are funded with Roth IRAs and 401 (k) s, on the other hand, do not do not do it.
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).
<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "2. Charge on municipal bonds"data-reactid =" 29 ">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.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Municipal bonds are those published 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 predefined period and collect interest payments semi-annually until your bonds mature 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 and that, if you buy bonds issued by your home country, you will not pay any national or local taxes. "Data-reactid =" 31 "> Municipal bonds are those issued by cities, states and counties and work in the same way as corporate bonds: you invest a certain amount of money, you agree to lend to the issuer over a pre-determined period and you earn semi-annual interest until your bonds mature and your principal is repaid.These interest payments in installments twice a year source of solid income in retirement, but as in most forms of income, the IRS is entitled to a share of this income.Bank of bonds issued by issuing companies The advantage of the purchase of municipal bonds is that their interests are always exempt from federal taxes, and if you buy bonds issued by your home country, you pay no local tax or state, no longer s.
<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "3. Switch to a state that does not tax social security"data-reactid =" 32 ">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.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "There is 13 states The current tax benefits of social security: "data-reactid =" 34 "> There are 13 states currently taxing the benefits of social security:
- 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.
<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 =" 52 "> 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 =" 60 ">Motley Fool has a disclosure policy.
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