Worried About Higher Taxes in Retirement? Strategize Now.
With the Tax Cuts and Jobs Act expiring after 2025, it’s a good time to be proactive about taxes. Here are some smart ideas to consider to put a lid on your tax bills in retirement.
Amid all the speculation about taxes possibly going up in the future, your best course of action may be to incorporate tax strategies in your financial plan geared toward retirement.
There are two important questions to ask yourself:
- How much of your income will be taxable in retirement? That includes Social Security, employer-sponsored retirement plans, investments, pensions and other potential sources of income.
- What will your tax rate be after you retire? Remember, today’s rates are low by historical standards, and the Tax Cuts and Jobs Act expires after 2025.
Here are options you can pursue now to reduce your tax burden in future years and in retirement:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Open a Roth IRA or Roth 401(k)
Based on the premise that taxes will be higher in the future, a wise move is making contributions that can grow tax-free. Two vehicles toward that goal are a Roth IRA or Roth 401(k). Contributions are made after taxes, meaning your taxable income isn’t reduced by the amount of your contributions when filing your taxes. But the benefit is in retirement, as earnings can be withdrawn tax-free starting at age 59½.
Three differences between the Roth IRA and Roth 401(k):
- Roth 401(k)s have a higher contribution limit. Employees can save up to $19,500 in 2021, and workers older than 50 have a maximum limit of $26,000 per year. Roth IRA contributions are limited to $6,000 annually, while workers older than 50 can contribute $7,000.
- There is no required minimum distribution for a Roth IRA. However, there is an RMD for the Roth 401(k) beginning at age 72. You can avoid that RMD by rolling it into a Roth IRA when you retire.
- Investors in a Roth IRA have more control over their accounts than they do in a Roth 401(k). In a Roth IRA, investors can choose any type of investment – stocks, bonds, etc. – but in a 401(k), they are limited to the funds offered by their employers.
Convert a traditional IRA into a Roth IRA
Some people opt to convert a traditional IRA into a Roth IRA because withdrawals from the former are taxable, while funds taken out of Roth IRA are not. The portion that is converted is taxed in the year that you make the conversion.
There is an income limit for contributing to Roth IRAs: For the tax year 2021, the government allows only those with modified adjusted gross incomes below $198,000 (married couples filing jointly) or $125,000 (for single filers) to contribute the maximum amount to a Roth IRA. Above those levels, the ability to contribute phases out. For married couples, once their incomes reach $208,000, they can no longer contribute. For singles, the upper limit is $140,000. However, earners above those limits still may convert via a backdoor Roth IRA, a tax loophole allowing indirect contributions. Consult your tax adviser or financial planner to determine if a backdoor strategy is right for you.
Weigh alternative investments
Look for income streams with favorable tax treatment. With rental income, for example, you have depreciation that you can write off against any income from rentals. Municipal bonds are typically exempt from federal income tax and, in some cases, state and local taxes. And with tax-managed mutual funds, fund managers work toward tax efficiency.
Consider cash-value life insurance
This is a popular retirement income tool because the funds can be a source for tax-free income. Though the premiums are high in the early years of a policy, the excess dollars are invested with the idea of growing the cash value. It’s difficult to know how the policy will perform in the long run, so it’s important to do your homework before the purchase and make an informed decision about the right cash-value policy for you. Factors to consider include whether you’re comfortable with taking on additional risk to obtain a potentially higher return, and the timeframe of when you want to access any cash values in the policy. It’s wise to consult a professional adviser to help you sort through your options.
While it’s uncertain what taxes will be like down the road, you don’t have to leave your tax situation completely to chance and to the whims of lawmakers. A financial professional can help you sort through the options and find solutions that would work best for you.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Emanuel Avina is a Registered Investment Adviser and the founder and president of Avina Financial Group Inc. He has been in the financial industry since 2007 and holds numerous securities licenses along with life, health and annuity licenses.
-
How Prepaid Verizon Phone Service Works and When It's a Smart ChoiceExplore the differences between Verizon Prepaid and Verizon Postpaid plans—costs, perks, flexibility, and when going prepaid makes sense.
-
Try This One-Minute Test to Uncover Hidden Health RisksFinding out this little-known fact about your body could reveal your risk of heart disease and more. It's a simple, free check for healthy aging.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.