Tax-efficient retirement planning
If you have an investment account outside of the tax-deferred retirement accounts discussed above, you should consider investments that are tax efficient.
Tax efficiency refers to how much you earn on an investment in comparison with the portion of the return that’s lost to annual taxes. Tax efficiency can be achieved in various ways. A qualified investment professional and your tax advisor can be a great resource in formulating such strategies.
Tax-exempt municipal bonds and U.S. savings bonds
Municipal bonds generate federally tax-exempt income. U.S. savings bonds are exempt from state and local income taxes, and you have the choice of paying federal income taxes on the interest either every year or only when you redeem or cash in the bond. Both are considered tax efficient.
Please note, investments may be offered only by properly licensed registered representatives. Product information is provided for informational purposes only and is not intended to advise or make recommendations on the purchase of a security. Always remember, the choices you make today can have a tremendous impact on both your current finances and your future retirement.
Life insurance, charitable trusts, and annuities
If the death benefit of your permanent life insurance policy is no longer needed (which is often the case after a mortgage is paid off and children have completed college), the cash value of your life insurance policy can be accessed to even out income levels in retirement. If the stock market declines, for example, and your required minimum distributions are lower than expected, you can access some of the cash value from your life insurance policy rather than dipping into your retirement savings. This can give your portfolio a chance to recover.
Taxes on annuities will depend on how the annuity is funded. Annuities purchased with pretax dollars (perhaps from an IRA or a 401(k)) will be subject to ordinary taxes. Annuities funded from a Roth IRA, will not be subject to taxes. If annuities are purchased with post-tax money, taxes will not be owed on the portion of the payout that is a return of the purchase price, but taxes will be owed on the portion that is in addition to the purchase price.
If you have significant assets, you may want to consider a charitable trust, which sets up your assets to benefit you, your beneficiaries, and a charity. You will be able to deduct a portion of the donations made to the trust, you will not have to pay taxes on investments held in the trust, and, if you are wealthy enough for estate taxes to be a concern, the amount of taxes owed when you pass away will be lower. Bear in mind, though, that charitable trusts are often irrevocable. They are also complex, and it may take considerable time and money to set trusts up properly.
Retirement tax brackets
Tax brackets for retirees are no different than tax brackets for pre-retirees. But retirees will notice tax differences. Social Security income is taxed differently than earned income. If your total income is less than $25,000 ($32,000 if you are filing jointly), you will owe no taxes on your Social Security income. If your total income is between $25,000 and $34,000 ($32,000 and $44,000 if you are filing jointly), you will owe taxes on 50% of your Social Security income. If it is more than $32,000 ($44,000 if you are filing jointly), you will owe taxes on 85% of your Social Security income.2 Even if you’re paying taxes on 85%, that’s still a discount. If you are taking distributions from a Roth IRA, you will not owe taxes on those distributions. You will owe taxes on distributions from traditional IRAs and 401(k)s, but you will not be paying Social Security and Medicare taxes on them. So these distributions may appear to go a bit further than your earnings did before you were retired. You will not pay Social Security and Medicare taxes on traditional pensions and annuities either.
Tax breaks for seniors and retirees
Tax breaks for taxpayers over the age of 65 may include:
- A larger standard deduction ($15,700 for individuals, compared with $13,850 for individuals under 65 in 2023).3
- A tax credit for eligible low-income seniors.
- Premiums for Medicare Part B and Part D, a medigap policy, or a Medicare Advantage plan can be deducted from self-employment income after retirement.
- Up to $100,000 can be transferred each year to a charity from an IRA or a 401(k) after age 70½.4 No taxes will be owed on that money, and the contribution will count as a required minimum distribution.
- Many states offer specific state tax benefits to seniors, and some do not tax Social Security earnings.
- Property tax rules vary considerably by state and locality. But in some places, people who are above a certain age and below a certain income level qualify for property or school tax deferrals or exemptions.
Frequently asked questions