Once you retire, your income will typically come from three sources – Social Security, retirement account distributions, and funds from investments and savings. Your income level will determine what tax strategies you can use to minimize how much is taken from your income by the federal and state government. You should talk to a financial advisor about how to protect your income and your retirement savings, says Donald Dirren, a financial advisor in Phoenix, Arizona.
There are several ways to minimize taxes on each source of income you take in as a retiree.
Live in a Tax-Friendly State Advises Donald Dirren
As we readjust in the wake of the Tax Cuts and Jobs Act, living in a tax-friendly state is more important than ever. Through 2025, only $10,000 in sales tax, state income, local income, and local property taxes will be deductible for the purpose of federal income taxes.
There are currently seven states with no income taxes:
- South Dakota
- Tennessee (in 2021)
Because the federal government does not allow the states to tax residents on retirement benefits earned in another state, relocating to a state with no income taxes can help you avoid state taxes on your income, explains Donald Dirren.
We realize that not everyone is able or willing to move just for tax purposes. But if you were considering moving anyway, why not choose a place that benefits your financial well-being?
Postpone or Avoid RMDs
You do not have to pay taxes on your required minimum distributions (RMDs) from your IRA if you are at least 72 years old and you are transferring the funds to a charity.
This is a relatively new development, says Donald Dirren. The age for RMD used to be 70.5 years old, but it was raised to 72 in the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act.
To qualify, you must transfer the funds directly to an IRS-approved public charity, and you must receive a receipt or written acknowledgment from the charity. There is an annual limit of $100,000 (per spouse in the household).
It is also important to note, says Donald Dirren, that this applies only to IRAs, not Roth IRAs, which are not subject to RMDs. Simple IRAs and SEP IRAs are also excluded.
Talk to a Professional
These are only two of the dozens of financial strategies you can employ to protect your income from being reduced by taxes, says Donald. He advises that you talk to a licensed financial advisor or wealth manager about your options to ensure that your income will carry you through your retirement.
Donald Dirren has been a licensed financial advisor for over 30 years in Phoenix, Arizona. His specialty is retirement planning and education, and his passion is helping Arizona seniors protect, preserve, and pass on their wealth. He is one of the top Safe Money Specialists with Bergen Financial Group and has a strong presence throughout Arizona as the owner and operator of two independent brokerage firms.