5 Ways to Lower Your Tax Bill in Retirement

A. I’m worried about paying taxes when I stop working, since I may be in a higher bracket. What are the best strategies for reducing my tax bills in retirement?

Q. It’s a good question, and it’s one you need to focus on well before you retire. “Overall, the way to reduce taxes in retirement is to plan ahead,” said Levi S. Brandriss, a certified financial planner in Bethesda, Md. These five moves can help fend off Uncle Sam.

1. Opt for a Roth 401(k).

Check to see if you have access to a Roth 401(k) on the job, which lets you save after-tax money that grows free of taxes. If so, you may be able to do what’s known as an in-plan conversion and roll over part or all of your pre-tax 401(k) savings into a Roth 401(k). The downside is you’ll owe taxes—at ordinary income rates—on all the pre-tax contributions to your account. That could be a large amount if you’ve only been contributing on a pre-tax basis. The upside is that you may still come out ahead with a conversion.

Here’s why: Once you hit age 70½, the IRS mandates that you take required minimum distributions (RMDs) from any traditional 401(k) or IRA accounts, and these distributions are counted as taxable income. This is Uncle Sam’s way of finally getting his share of the savings that have grown tax-deferred for decades. The distributions could bump you into a higher tax bracket and also increase your Medicare Part B premiums, which are tied to income. So reducing the size of your RMDs can make a big difference to your tax bill.

But there are two caveats: This move only makes sense if you have the cash on hand to pay the tax bill, and you’re certain your tax rate won’t fall in retirement. So this strategy isn’t right for everyone.

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