Here’s another reason to love retirement—the ability to save big money by managing your annual tax bill.

Once retired, you decide when you get paid—and from which accounts to draw that money.

How can you turn this flexibility to full advantage? Here are three strategies…


Conventional wisdom says retirees should tap their taxable accounts first, traditional retirement accounts next and Roth retirement accounts last. That way, you squeeze more tax-deferred growth out of your traditional retirement accounts, such as your 401(k) and IRA, and more tax-free growth out of your Roth 401(k) and Roth IRA.

But if you follow the conventional wisdom and pay for your initial retirement years by dipping into, say, savings accounts and certificates of deposit held in taxable accounts, you may find yourself paying little or no taxes—which in the long run is a terrible waste.

Better strategy: Take advantage of these low-income, low-tax-rate years to withdraw some money from a traditional IRA or 401(k). You even could convert part of your traditional IRA to a Roth IRA. The conversion would trigger a tax bill on the sum converted, but thereafter the money in the Roth would grow tax-free.

By shrinking the size of these traditional retirement accounts in your 60s, you may avoid big tax bills once you’re in your 70s and you have to take required minimum distributions (RMDs) from your retirement accounts. Those RMDs will boost your taxable income and could, in turn, trigger taxes on up to 85% of your Social Security benefit!

Suppose you expect to be in the 25% federal income tax bracket once you start RMDs in your 70s. To reduce those big tax bills, you might want to generate enough taxable income in your 60s to get to the top of the 15% bracket. In 2014, that would mean generating at least $94,100 in total income if you’re married filing jointly or $47,050 if you’re single. Because income that high could lead to taxes on your Social Security benefit, consider delaying your Social Security benefits until as late as age 70. That can be a smart move anyway because your monthly check will be significantly larger as a result of the delay.


Got a year with large itemized deductions, perhaps because of hefty medical expenses or large charitable contributions? Those deductions will reduce your taxable income, and you could find yourself in a lower tax bracket than normal. To get more value out of your deductions, consider making larger-than-usual withdrawals from your traditional IRA.


Suppose you need to buy a new car or replace your home’s roof. To generate the necessary spending money, you might be tempted to take an extra-large withdrawal from your traditional IRA. But not only could that withdrawal get taxed at a high rate, the extra taxable income also might trigger taxes on your Social Security benefit.

What to do instead? Consider tapping your savings account or money-market fund held in a regular taxable account or, alternatively, making a tax-free withdrawal from your Roth IRA.

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