6 Tax Tips for Successful Retirement Planning by Brendon Pack

6 Tax Tips for Successful Retirement Planning

While it's great to daydream about retirement, it pays to plan ahead.

by Brendon Pack
updated March 02, 2020 · 3 min read

Whether your retirement is days, months, or even decades away, there are plenty of things you can do today to make sure your transition from worker bee to retiree goes smoothly. And there is a buffet of tax implications to consider before you accept your gold watch. Still, smart retirement planning doesn't have to be a source of stress.

Here are six tax tips to help you ease into retirement and enjoy the benefits of a lifetime of hard work and planning.

1. Contribute to Your Retirement Plan

It's important to contribute to a retirement plan well before you need to tap into those funds. Contributing to a retirement plan can give you immediate tax deductions throughout the course of your working life while putting you in a better financial position for the future.

But don't stop thinking about your finances once you hit the links. After you retire, a Roth IRA or Roth 401(k) are both good options because they give you added tax flexibility. Since you will already have paid taxes on the money you invested there, you can generally make withdrawals from a Roth tax free, as long as you are over 59½ and your contributions were made more than five years prior to that. This could be key to keeping your earned income in any given year from creeping into a higher tax bracket.

2. Utilize Catch-up Contributions

If you are age 50 or older at the end of a calendar year, the Internal Revenue Service (IRS) permits you to make annual “catch-up contributions." In other words, you can put even more money into your retirement account than if you were younger.

If you have a 401(k) plan, you may be allowed to contribute up to an additional $6,000 into your plan for the 2019 tax year. The one exception is a SIMPLE 401(k), which allows you to make catch-up contributions of up to $3,000 in 2019. For traditional or Roth IRAs, you can contribute up to $1,000 more in catch-up contributions. Catch-up contributions are good news for your current taxes because they can sometimes reduce your tax bill before you retire.

3. Pay Off Your House

Some taxpayers have traditionally used mortgage interest to offset a portion of the taxes they owe each year. The changes to the tax laws made by the Tax Cuts and Jobs Act of 2017, however, made deducting mortgage interest a moot point for many taxpayers, since fewer filers now itemize their deductions.

As you near retirement, the expense of paying a mortgage can become a big burden. And paying a mortgage while you're retired can really place a drain on your savings.

4. Work As Long As You Can

Most retirees underestimate the amount they'll need for retirement, often because they fail to take inflation into consideration. One way to combat an underfunded retirement is to work as long as you can. You'll save more to keep your quality of life high in your golden years.

There are also specific tax advantages to working later into life. The longer you wait to begin taking social security disbursements (up to age 70½), the longer you can avoid paying taxes on those disbursements. Once you retire and begin taking disbursements, you may find yourself in a lower income tax bracket than you were before, so your disbursements may be taxed less.

5. Keep Expenses in Check

When you retire, you can reduce your taxes by managing your expenses. The more you spend, the more you'll need to draw on your retirement savings. Unless you have a Roth account or other savings that have already been taxed, you will pay income tax on any distributions you take from your retirement account.

The less you spend, the less you need to withdraw from your retirement accounts. Doing so may keep you in a lower tax bracket, which allows you to benefit from several different tax deductions.

6. Get Tax Investment Help

Getting investment help from a tax accountant can help you to better prepare for retirement beforehand. A tax accountant can also help you manage your tax situation after you retire, making sure you're best positioned to take advantage of all available tax breaks.

Have questions for a tax adviser? LegalZoom provides access to tax professionals through a prepaid advisory plan. You get advice on an unlimited number of new tax matters, along with many other benefits for a low monthly fee. You can also sign up for a free tax consultation with 1-800Accountant directly.

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Brendon Pack

About the Author

Brendon Pack

Brendon Pack is Chief Revenue Officer (CRO) at 1-800Accountant, the nation's leading accounting firm for small business.… Read more