Six ways to pay less tax on your retirement funds

How long will your tax-deferred retirement savings last as you use them to supplement your Social Security checks? Obviously the answer is affected by how much you saved and the unknown factor of how many years you will live in retirement. But it also depends to a large extent on how much Uncle Sam leaves you after he takes what he calls his fair share. This is when the juggling act begins, figuring out ways to live comfortably and still make your retirement income stretch.

Here are some ideas to help you save money by reducing how much Uncle Sam will bite off.

1. Wait longer to collect Social Security. The longer you wait, the bigger your checks will be. You can start collecting anytime from age 62 to age 70, but for each year you wait, your check should grow by about 6.25 percent, according to financial planner Daniel White (of Philadelphia’s Daniel White & Associates). But another benefit is the role tax will play.

One study published last year in the Journal of Financial Planning showed that if you fund your own retirement until you turn 70, your money could last up to 10 years longer than if you start taking Social Security at age 62. That’s partly because of the tax you could end up paying on your Social Security benefits.

2. Take IRA withdrawals strategically. According to the rules in place regarding tax-deferred retirement plans, you must start taking withdrawals no later than age 70.5, or incur harsh penalties. So how can you take your money out without paying a bundle in taxes?

William Reichenstein, investment management chair at Baylor University, advises retirees to match your withdrawals with the years when your taxable income will be lower, say, under the 25 percent tax bracket.

• In 2013, for a single person that means below $36,250.

• For a married couple filing jointly, below $72,500.

If you stay below these levels, you will generally pay 10 percent or 15 percent on your withdrawals, said Reichenstein.

In years when you have higher deductions against your taxable income – such as medical expenses or charitable donations – it’s safer to pull out your tax-deferred withdrawals. Let’s say one year you and your spouse have pension income of $40,000, which would put you into the 25 percent tax bracket, but you also had medical expenses and charitable donations of $20,000. You could easily pull money out of your tax-deferred IRA and still stay under the higher tax bracket.

3. Monitor the tax on your Social Security benefits. If you will owe taxes on your Social Security benefits, you could be better off to make estimated tax payments yourself, rather than letting the Social Security Administration do it, especially if your income fluctuates. Tax on Social Security benefits kick in when your “combined income” exceeds certain levels. The official definition of your “combined income” is your adjusted gross income, plus non-taxable interest such as interest on a tax-free bond, plus 50 percent of your Social Security benefits.

• For an individual with combined income of $25,000 to $34,000 you could pay normal tax rates on up to 50 percent of your benefits.

• If your combined income exceeds $34,000 you could pay tax on up to 85 percent of your benefits.

4. Make charitable donations from your IRA. If you are age 70.5 and up, you can avoid the taxes on IRA withdrawals on money that you donate from your IRA to a qualified charity, up to $100,000. That allows you to not only beat the tax, but it satisfies your minimum distribution requirement too.

Let’s say you intend to donate $10,000 to the Humane Society. If you donate directly from your IRA, the charity gets every penny, and you pay no taxes on the withdrawal. If you withdraw the money first, then donate it, there will be tax due out of the proceeds. So, if the tax turns out to be $1,500, the charity ends up with $8,500.

Caution! This favorable tax provision was due to expire at the end of 2012, but was extended by Congress through 2013. With the government going hard after every tax dollar, this could easily vanish. If you plan to do this, talk to an adviser while there is time.

5. Convert a traditional IRA to a Roth IRA. If you foresee tax rates going up, or if you think you yourself will be in a higher tax bracket in years to come, it may be a good idea to convert a traditional IRA to a Roth IRA now. Of course that will mean you will pay tax now, so only do this if you can afford to pay the tax at this time.

Converting to a Roth IRA protects you against future tax hikes, since when you withdraw the money later, it will be tax-free, said Matthew Curfman, certified financial planner, Richmond Brothers, in Jackson, Mich.

Another benefit of a Roth IRA is that there is no mandatory withdrawal requirement, so you can leave your money there and let it grow. Plus, when you do take money out, these withdrawals are not counted in your combined income.

6. Move to a state that is tax-friendly. Kiplinger’s reported at the end of 2012 that the three states that are most tax friendly to retirees are Alaska, followed by Nevada, and then Wyoming. The worst are Ohio, followed by California, then New York. Of course where you retire involves many factors, but if you are looking for more disposable income in your golden years, a move might be a good idea. California now has the highest personal tax rates in the nation (13.3 percent for 2013). That means by moving just over the border to Nevada, you boost your disposable income by 13.3 percent. That’s a hefty raise by any standards.

This article is based in part on information provided by Steve Yoder, a writer for

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