Saving for retirement is challenging no matter who you talk to. So why have a separate set of retirement tax strategies for women?
It is true that both men and women are subject to the same IRS rules. They have similar resources and savings tools at their disposal. However, different life circumstances can make saving for retirement different for women.
Our SYM Financial Women’s Initiative leader, Michelle Hipskind, puts it best. “Women have a tough puzzle to solve when it comes to retirement. They’ve either earned less over their working career, or they’ve stepped out of the workplace to care for the family. Both of those things affect their retirement nest egg. In real terms, it can translate to lower amounts saved, and lower Social Security benefits they can expect to receive.”
Additionally, women live an average of 5.4 years longer than men. This means they have to put extra effort into making their nest eggs last as long as possible. Therefore, minimizing taxes on those savings will be critical. With that stage set, here are five retirement tax strategies that can potentially help you lower your tax bill in retirement.
1. Start Contributing to Roth-Style Plans
Roth-style plans are a great way to create a bucket of money that will be tax-free in retirement. Unlike a traditional IRA or 401k, where taxes are deferred into the future, Roth-style plans offer you the chance to enjoy tax-free withdrawals in exchange for paying taxes now when you contribute.
Roth plans can be a good fit for someone who wants to create as much tax-free income as possible (or who expects to be in a higher tax bracket when they retire). This may be especially important if you anticipate being affected by the American Families Plan proposed by president Biden.
You can open a Roth IRA anywhere that IRAs are offered. Roth-style 401ks are only available if they’re offered by your workplace retirement plan. Don’t forget that if you’re over age 50, you can contribute an extra $6,500 into your 401k and $1,000 into your IRA.
2. Target a Lower Tax Bracket
The amount of taxes you owe every year in retirement depends on where your income is derived and whether or not it’s considered taxable. If you can strategically pull from certain retirement buckets and keep your taxable income from spilling into the next (higher) tax bracket, it can potentially keep you from paying more than you need to.
For example, when you’re a joint filler, every taxable dollar you withdraw beyond $81,050 will be taxed at 22% instead of 12% (according to the 2021 marginal tax bracket system). Therefore, a smart approach might be to withdraw from your taxable buckets up to the 12% limit and then supplement the rest of your living expenses from your non-taxable bucket (such as your Roth-style accounts).
Tax laws can be complicated, and this type of planning is not something you should try to handle yourself. Remember to work with a trusted financial advisor who can look at all of your resources and needs to recommend the plan that’s best for you.
3. Wait on Social Security
Even though you can begin taking Social Security benefits as early as age 62, it may be in your best financial interest to wait until the full retirement age of 67. This is especially true for women who have had a history of lower earnings during their working years. Early benefits can often be around 30 percent less than what you would receive at full retirement age. If you can wait until the maximum age of 70, then you can expect to receive even higher benefits.
From the tax perspective, the greater your benefits, the more tax-saving opportunities you’ll have. For example, joint filers whose combined taxable income is less than $44,000 will only have to pay taxes on 50 percent of their Social Security benefits. Being strategic about which buckets you draw your retirement income from can help you with this strategy.
Keep in mind that if you’re divorced or widowed, you may still be entitled to benefits from your former or deceased spouse. Check your official Social Security account to know for sure. Also, work with a financial planner to understand the rules and the restrictions, as your decision can affect your own benefits.
4. Move to a State With No Income Taxes
Another clever way to reduce your overall tax bill is to lower the amount you owe to the state you live in.
Each state charges different income tax rates. In fact, if you live in any of the following 7 states, then you won’t owe any state taxes at all:
- South Dakota
Of course, moving is a deeply personal decision, and it should only be done if the circumstances are right. Use caution not to exchange tax-savings for a cost-of-living increase. However, if you were already planning on relocating, then the move could be a chance to lower your tax bill.
5. Give to Charity
If you’re already inclined to give to charities, consider a QCD or “qualified charitable distribution.”
Here’s more from Michelle Hipskind. “If I were to take income out of an IRA and keep it to pay bills or go on vacation, then I’d have to pay income tax on those withdrawals. However, if we send that same money directly to a 501(c)3, no taxes will be withheld — and the organization gets your entire contribution. It’s a win-win, for people who are making charitable contributions anyway.”
This can be especially useful for people who are over age 72 and have to start taking RMDs (required minimum distributions). Instead of paying taxes on the full amount of the distribution, you can decrease the taxable portion by giving some of those distributions to a charity instead.
If you are looking toward retirement and have questions about lowering your tax bills and getting the most out of your nest egg, reach out to us at SYM Financial. Our team has helped hundreds of women plan for a peaceful, tax-smart retirement.