Top 5 Ways to Keep Taxes Low in Retirement

If you want to keep taxes low in retirement, a handful of strategies can be used while working or when retired to keep your tax bill reasonably small. The reasons to do so may seem obvious — most people prefer to keep more and pay less in taxes — but there are some advantages to keeping your taxable income relatively low that you might not be thinking about.

Some options may seem counterintuitive. For example, it might make more sense to incur taxes in the present to avoid higher taxes in the future. As the final deadline to pay 2022 taxes has passed even for those of us who filed an extension, let’s dig into the ways we can plan for a low-tax retirement.

Top 5 Ways to Keep Taxes Low in Retirement

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While it’s nice to defer taxes while working by investing in a tax-deferred 401(k), 457(b), or similar account, you’ll want to invest additional money in a “taxable” account with few restrictions and numerous advantages.

#1: Build Up a Taxable Brokerage Account

In retirement, especially when retiring early, a taxable account can be a great primary source of spending. Only the gains are potentially taxable; your cost basis (what you paid for the asset) won’t be taxed when you sell.

There’s a clear tax benefit to having some Roth money at your disposal when retired. You won’t owe any taxes on money withdrawn from a Roth IRA or Roth 401(k).

#2: Make Roth Contributions While Working

If you are planning to retire early, Roth contributions might not make the most sense for your 401(k), but the backdoor Roth is a great option as an alternative to some of your taxable account investing, and beginning in 2023, you can contribute $6,500 to a Roth IRA or $7,500 if you’re age 50 or more.

Converting tax-deferred dollars to Roth dollars is a taxable event. It creates taxable income. So why would this be a good strategy to employ in retirement?

#3 Strategic Roth Conversions in Retirement

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