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How To Pay Low (Or No) Taxes In Retirement

Believe it or not, you still have to pay taxes in retirement. And these taxes will apply to every form of post-retirement income, passive or otherwise, such as your pension, your social security, your tax-advantaged investment accounts, and more.

Today we’re going to cover all the different types of income tax you may encounter in retirement - but that’s not all. We’re also going to share some major tips on how to reduce those taxes, and potentially avoid them completely!

Tax-Advantaged Retirement Accounts

Let’s look at how your tax-advantaged accounts are going to be taxed in retirement. Tax-advantaged retirement accounts include:

  • 401k

  • 403b

  • Traditional IRA

  • Roth IRA

  • HSA

The 401k, 403b, and traditional IRA are all tax-deferred accounts, so once you retire and start withdrawing money from any of these accounts, those withdrawals will be taxed at the ordinary income tax rate.

But perhaps the most beneficial tax-advantaged account is the Roth IRA because you contribute your money after tax has been deducted but then it is allowed to grow in the account tax-free. No matter how much your contributions grow, you will never be taxed once you’ve deposited them into a Roth IRA. Of course, there are caveats on the withdrawals that you make:

1) you have to be over 59 and a half years old

2) your money has to be in the account for atleast 5 years before you can withdraw it.

You can then withdraw your contributions tax-free, allowing you to build significant wealth via the Roth IRA.

Next is the HSA (Health Savings Account). Now contrary to popular belief, the HSA truly is a retirement account. In terms of tax benefits, the HSA reduces your taxable income and allows your contributions to grow tax-free. And if you need to withdraw funds for qualified medical expenses, these contributions can be taken out 100% tax-free!

But one of the coolest things about an HSA, particularly for retirees, is that once you reach 65 you can withdraw any amount of money from your HSA, for any purpose. It will still be taxed like a traditional IRA, but this gives it a dual purpose - both as a tax-deferred retirement account and a tax-free account for medical expenses.

Traditional Brokerage Accounts

If you are pursuing FIRE, you’re likely to have a lot of money in a traditional brokerage account. But how is it going to be taxed?

Well, income is generated from these accounts in three ways: capital gains, interest, and dividends. These are the three kinds of income a retired person with a traditional brokerage account can expect, and all three are taxed differently. Let’s take a look:


They can be taxed in two ways, depending on whether they are qualified dividends or non-qualified ordinary dividends. Qualified dividends are paid out by the company, so you will be taxed at the long-term capital gains tax rate, which is typically much lower than non-qualified. Non-qualified dividends are taxed at an ordinary income tax rate.

Generating Interest

The interest you generate in your brokerage accounts is also going to be taxed, and it is taxed at the ordinary income tax rate. And what’s unique is that you can be taxed on the interest of something like, at the ordinary income tax rate, but they can also be taxed differently at the state or federal level - so you need to be aware of how interest will be taxed for the specific assets you hold.

Capital Gains

When you have an investment portfolio that appreciates in value, the shares you can sell from that profit are a form of capital gains. And those capital gains will be taxed differently depending on how long you have held the investments.

For example, if you sell an investment that you have held for a year or less, you’ll be taxed on your profits based on the ordinary income tax rate.

On the other hand, if you’re selling investments you’ve held for more than a year, the profit you’ve made from that investment will be taxed at the long-term capital gains tax rate, which tends to be lower than the ordinary income tax rate.

When it comes to investing, taxes are easily some of the biggest fees that you pay. If you’re on your FIRE journey, or you’ve already achieved financial independence and are officially retired, paying unnecessary taxes can really get in the way of your life plans.

Social Security and Pension

If you are collecting social security, you can be taxed anywhere from 0 to 85% of your social security benefits, depending on your sources of income and whether or not you earn over $34,000 from this income.

Pensions are taxed depending on how you contributed to that pension. If you contributed with pre-tax dollars, then that pension money you take out will be taxed at an ordinary income tax rate, which is important to understand when you are contributing to a pension.

Tips For Reducing Taxes In Retirement

Now that you understand how different kinds of income are taxed, here are four helpful tips to reduce taxes in retirement.

1. Make Sure You Understand Your Tax Bracket

If you don’t know which tax bracket you fall into, you won’t know how to keep yourself in the right tax bracket. The US has a marginal tax system, which means that even once you reach over a certain income bracket, not all of your money will be taxed at that level. It’s marginal.

Understanding those tax brackets, and which ones you fall into, will help you to figure out how you will draw on different types of income to remain within a certain tax bracket.

2. Be Strategic With Those Tax Brackets

Assuming you now know which tax bracket you fall into, you want to strategically pull on each of your different accounts to keep you within a lower tax bracket to ensure you’ll pay as little income tax as you can.

For example: If you are pulling from a Roth IRA, traditional IRA, and a traditional brokerage account, you will start to understand how that money is being taxed collectively, and you will be able to withdraw money in such a way that you can keep yourself in those lower tax brackets. The income from that Roth IRA will not count against your taxable income, so it won’t push your income into a higher tax bracket.

3. Be Strategic When Selling Your Investments

Remember that tax on your capital gains will change depending on how long you have held an investment. To reduce taxable income on capital gains, it’s important to focus on those profit-generating investments that you’ve held for longer than a year.

‘Tax loss harvesting’ is another technique you can use. This is a combination of selling stocks at a loss to offset the stocks you’ve sold at a gain. By doing this you’re paying taxes off of your total profits. You’ve got the total profits from those capital gains, minus the losses, which usually reduces the amount of taxes you know.

4. Retire In A Different State

Specifically, a state with a lower income tax rate - or even one with no income tax. There are 8 such US states with no income tax, which is an incredibly effective way to reduce the amount of tax you pay in retirement.

Finding a unique retirement strategy that works for you is an essential part of achieving FIRE. Hopefully, the ideas above have given you some new ideas for how to increase your income and reduce your taxable income, so you can retire early as comfortably as possible.


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Hello, We’re Amon & Christina

We’re former federal government employees that focused on saving, making, and investing money so that we could grow enough wealth in our investments to never have to work again.

And, guess what? We did it! At the age of 39, we reached financial independence, quit our jobs, and . . . we retired!

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