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It’s never too early to begin planning for retirement. Here are some of the best strategies for saving on retirement taxes. [[{“value”:”
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Whether you’re planning to retire next year or 30 years from now, it’s a good idea to plan for the time when you can do what you want, kick back, and enjoy life. The fact is this: The less money you have to pay in taxes, the more money you’ll have to finance your golden years. Here are four tax strategies it’s never too soon to plan for.
1. Take every deduction available to you
The older you grow, the more perks the IRS offers. The best tax software programs can also help you discover and claim all the tax breaks you’re entitled to as a retiree. Here are a few examples:
Boosted standard deduction: Once you turn 65, the IRS allows you to take a larger deduction on your tax return. For example, for the 2023 tax year, a single 64-year-old could claim a standard deduction of $13,850. A 65-year-old’s standard deduction is boosted to $15,700, an increase of $1,850.An IRA, even if you’re not working: If you’re married and your spouse is still working, you can contribute to a spousal IRA. While there are limits on how much you contribute ($6,500 for 2023 and $7,000 for 2024), the account is all yours.Medical expenses: All those medical-related expenses you pay may be deductible if they exceed 7.5% of your adjusted gross income (AGI) and you itemize your personal deductions. Before assuming you don’t have enough expenses to take this deduction, take a look at this IRS publication listing some of the eligible expenses. It’s surprisingly extensive.
2. Keep that small business alive
If you own a small business but don’t have any employees, you can continue contributing to a Solo 401(k) for as long as you continue to work. Not only do you contribute pre-tax dollars and save on taxes, but if you’re married, your non-working spouse can take advantage of the spousal IRA.
As long as you’re healthy and enjoy what you’re doing, consider keeping your business alive.
3. Take advantage of a health savings account
Employees may groan when they learn their company has a high-deductible health plan, but there is one pretty great advantage: Access to a health savings account (HSA). Unlike other health plans, the money you contribute each year does not have to be spent. Instead you can allow it to roll over into the next year (and the next year). Better yet, like an IRA or 401(k), the funds in your HSA will continue to grow.
Here’s the tricky bit: If you spend the money in your HSA on a non-qualified medical expense the IRS considers the funds taxable and imposes a 20% penalty on the amount withdrawn. However, the 20% penalty does not apply if you’re 65 or older. Hold on to that HSA into retirement and you’re going in with a financial advantage.
4. Look at tax-efficient investments
There are less taxes owed on some investments than others. For example, municipal bonds are not taxed at the federal level and some qualified dividends are taxed at a lower capital gains rate than ordinary dividends.
You can also minimize taxes by holding onto investments over the long term. Holding investments instead of buying and (quickly) selling means you’re only taxed on realized capital gains, or when you sell the investment. At a minimum, hold onto taxable assets for at least one year so you’re not stuck paying the standard tax rate.
We may gain wrinkles as we age, but we also gain wisdom and knowledge. And we’re wise enough to put that knowledge to work by employing the tax strategies that save the most money.
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