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Paul McNulty, CFP ® | Boston Metro Advisor

Paul McNulty, CFP ® | Boston Metro Advisor

Financial Advisor in Boston, MA

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How to Minimize Your Tax Liability During Retirement

You are here: Home / Retirement / How to Minimize Your Tax Liability During Retirement

June 7, 2018 By Paul McNulty

iStock 653883836Retirement planning involves more than just income planning. You will also set a budget for yourself, prepare for unexpected surprises in the future, manage any investments you might hold, and plan for taxes. With regard to taxes, you might be surprised to learn that your Social Security benefits can be taxed… So planning to minimize that expense can make a big difference in your retirement income over time.

Keep the taxable thresholds in mind. Social Security benefits are taxed according to certain thresholds, regarding your benefits plus taxable income. If you’re single, you won’t pay taxes on your benefits as long as your income falls below $25,000. That threshold rises to $32,000 for married couples.

Of course, most people earn more than that. If you’re single, and income falls between $25,000 and $34,000, half of your Social Security benefits can be taxed. For married couples, income between $32,000 and $44,000 will result in half of benefits being taxed.

And, if your income goes above $34,000 (for singles) or $44,000 (for married couples), up to 85 percent of benefits will be subject to income taxes.

It’s important to keep these thresholds in mind when planning for retirement income. For example, a married couple would probably rather earn $43,990 per year than $44,010!

Consider a Roth IRA. Money saved in a Roth IRA has already been taxed, so you will enjoy non-taxable income in retirement. Since Social Security benefits are only taxed based on taxable income, a Roth IRA essentially allows you to increase your actual income without triggering taxes on benefits.

Maybe you should take IRA distributions first, then Social Security later. Anticipating high taxes, some retirees begin taking their IRA distributions, while deferring their claim for Social Security benefits until age 70. This allows them to reap the maximum possible benefit. At that point, they might reduce IRA distributions to mind the taxable thresholds.

The above strategy is not right for every situation, but it’s definitely one option to consider. Make an appointment with us to discuss all of the opportunities available to you, and we can help you decide on how to most effectively minimize taxes on Social Security benefits.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Woburn, MA 01801

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