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Investing Specialists

Tax Tips for Retirees

Morningstar.com readers share their strategies for lightening the tax load in retirement.

We've just wrapped up Tax Relief Week 2016 on Morningstar.com. We offered investors tips for making the most of tax-sheltered accounts, optimizing taxable holdings, finding tax-efficient investments, and crafting tax-wise portfolios.

During the week, we asked our retired readers to share any tax-saving strategies they've used in retirement. Strategies for limiting taxes during retirement ran the gamut from selecting tax-friendly investments, converting traditional IRAs to Roth IRAs, giving to charity, and more.

To read the complete thread or to share your own tax tips, click here. Because individual circumstances differ, consult with your tax specialist about which strategies would work best for you.

Continue Pre-Retirement Tax-Friendly Habits
Many readers noted that once retired, they continue tax-aware habits they developed during the accumulation stage of their lives. For some, that means holding investments long enough to qualify for long-term capital gains rates and engaging in tax-loss selling when possible. "I buy and hold usually," says srercrcr. "Never sell a taxable holding unless I bought it this year and it is way down and ripe for tax-loss selling."

Several readers, including Tomas47, practice asset location: "We keep the most tax-friendly assets in our taxable account--broad stock market index funds and international funds. While the tax paid to foreign countries is taxed as a dividend, the amount paid is fully deductible as a tax credit. Bonds, TIPS, and REITs go in the IRA."

"I have munis, and I am cutting back on any funds that have larger amounts of unqualified dividends unless in tax-advantaged accounts," writes atomiccab.

Convert Traditional IRAs to Roth IRAs
Converting some traditional IRA assets into Roth IRAs is another popular way to manage taxes during retirement for many readers. "Convert a portion of your IRAs to Roth IRAs when your income is low after retirement," suggests WOODJ. "Spread the conversion over several years to reduce the annual taxes in those years. Note: you don't have to convert all, just a portion to have the desired result."

Because required minimum distributions (RMDs) will eventually push bill heitbrink into a higher tax bracket, "I will simply start doing some partial conversions from traditional to Roth accounts before I turn 70 1/2. In addition, I will emphasize distributions from only the tax-deferred accounts. In the near future, I will not take distributions from Roth accounts. Roth accounts will ultimately become a larger fraction of the retirement account total."

Manage Charitable Contributions
"Charitable giving is our favorite, and most enriching, strategy," says povdds. "Regarding RMDs and Social Security, we hope to send as much of these as we can to a good organization before we start dipping into them, so we don't even know the money is there." Retirees can send their RMDs directly to charities of their choice via a qualified charitable distribution (QCD).

Effectively planning your charitable contributions over time can also save on taxes. "I am thinking of pushing two years' worth of contributions plus whatever taxes I can do into one year," writes johnep. "We would itemize that year and then do standard deduction the next year. This would give us about $6,000 more in deductions over two years than doing deductions every year."

Tax Planning Evolves as Your Retirement Evolves
Finally, several readers pointed out that your tax plan will need to change as you go deeper into retirement, once RMDs are in the picture. "Far too many retirees fall into the trap of low taxes immediately after retirement, only to get hammered later on by RMDs," notes Gatorbyter. "Bottom line: If you have amassed a lot of tax-deferred wealth, give proper consideration to 'leveling' the income throughout your retirement as opposed to back-ending it all (RMD nightmare)."

Retiredgary provides his tax-planning blueprint for three stages of retirement: After retirement but before tapping Social Security, spend from taxable accounts and do IRA conversions; after tapping Social Security but before RMDs, be aware of how much of your Social Security benefits may be taxed if you engage in Roth conversions or take distributions from retirement accounts. And lastly, "When one reaches the age of RMDs, give up and pay through the nose."

Just remember, tax planning during retirement isn't a "one-and-done" event. FingerlakesGuy summarizes it nicely: "It's an ongoing long-term endeavor that will change from year to year."

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