Saving money is critical after retiring from a lucrative job. When onliving on a fixed income, federal retirees must find other ways to make their money last. When tax season rolls around, the last thing they want to do is write a huge check to Uncle Sam. However, without a plan in place, some end up owing more than planned.

Retirees usually draw an income from a few sources, including Social Security, FERS/CSRS pensions, IRAs, TSP and 401(k) plans, savings, and brokerage accounts. Even those that have saved successfully recognize that it’s imperative to make available funds last for as long as possible. Here are some tips to help people lower taxes and keep more money in their pockets instead.

Tip 1: Move to Another State

When it comes to taxes, not all states are equal. Where a person lives directly affects how much they pay the government each year. In addition to federal income tax, residents may also be responsible for paying state tax, property tax, sales tax. For example, California residents have a hefty 13.1-percent state income tax rate, depending on how much residents earn.

Moving to a state with a lower cost of living is perhaps the easiest way to go down a tax bracket or two. Some states have lower income tax rates & others do not tax military or federal pensions. Currently, seven states don’t assess a state income tax at all on their residents. These include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee will also eliminate its state income tax by the end of 2021. Buying a home in one of these states may help reduce tax liabilities.

Tip 2: Convert to a Roth IRA

There are two types of IRAs: traditional and Roth. IRAs are one of the most popular retirement accounts available. In 2021, taxpayers can contribute up to $6,000 to an IRA account. The amount increases to $7,000 for those 50 and older.

With a traditional IRA, the account owner pays the IRS on any distributions they take. However, a Roth IRA works differently. Taxpayers fund these accounts with after-tax dollars. Any withdrawals they make after retiring are essentially tax-free. Converting part of a 401(k) or traditional IRA to a Roth IRA is one way retirees can lower their tax burden down the road in retirement – but be prepared to pay the IRS the taxes owed on the converted amount.

Tip 3: Implement an Asset Allocation Strategy

Asset allocation is a tax strategy that people often overlook. Some investments have higher tax rates than others. For example, short-term capital gains rates can be much higher than long-term capital gains rates, depending on a person’s income. Avoiding higher rates will help lower a person’s overall tax burden.

How does asset allocation work? In this context we are talking about allocating our portfolio in a way that creates tax diversity. This could be through tax-wise contributions to Roth accounts, converting tax-deferred accounts, and then coordinating distributions to utilize taxable dollars early in retirement so as to prepare for higher future tax rates later.

Tips 4: Leverage Cash Value Life Insurance

Most people believe life insurance only provides financial stability to surviving heirs through a death benefit. However, this notion isn’t entirely true. Policyholders of properly designed permanent policies can actually borrow against the cash value of their life insurance while alive or accelerate the death benefit (in the event of a qualifying medical emergency). Policy owners who borrow against their cash value are given access to the desired funds without obligation of how the proceeds must be used, they can pay for anything, such as vacation or home repairs. These features provide financial flexibility to many people x especially those who are concerned about future tax rates eroding their legacy.

Properly designed policies offer features that can allow tax-free distributions. Retirees can use life insurance to remain in a lower tax bracket. However, borrowing against a life insurance policy could reduce its death benefits payout. Always work with a knowledgeable professional and read the fine print for any potential pitfalls or penalties.

Tip 5: Create a Social Security Strategy

Those who have paid into Social Security for 40 quarters are eligible to receive benefits upon reaching age 62. However, these benefits are often partially taxable as income. The IRS determines a beneficiary’s tax rate based on their annual household provisional income. Reducing your provisional income can lower the amount of your Social Security benefit that is taxable – further reducing your total tax bill.

Anyone who doesn’t need the extra income right away may want to consider waiting until they turn 70 to collect benefits. Doing so could keep them in a lower bracket temporarily, potentially creating additional opportunity for Roth conversions. Seasoned money that is withdrawn from a Roth IRA comes out 100% tax-free and doesn’t count towards provisional incomes so distributions won’t affect the tax rate of a person’s Social Security benefits.

Reliable Tax Planning for Retirees

Walker Capital offers tax planning, insurance planning, and benefits coordination to federal employees and retirees from across the country. We work closely with federal employees, small business owners, and individuals to create proven financial strategies and reduce tax burdens.

Workers can’t wait to retire, but once they do, they learn the challenges of living on a fixed income. The last thing they want is a huge tax bill from the IRS at the end of the year. Implementing one or more of these tips may be all it takes to stay in a lower tax bracket.