3 Ways to Reduce Taxes on Your Retirement Savings


According to U.S. Census Bureau figures, 12,000 people will start turning 65 each day, hitting an estimated total of 4 million for 2024.

If you are one of those 4 million people, you may be thinking about ways to limit tax liability on your retirement income. You will want to keep as much of your money as possible and see as little as possible go to Uncle Sam.

Yieldstreet has prepared three ways to reduce taxes on your retirement savings.

Withdrawals From Your Retirement Accounts

You will be required to start withdrawing money from your traditional Individual Retirement Account (IRA) and 401(k) by the age of 73.

These required minimum distributions (RMDs) must begin by April 1 following your 73rd birthday. If you are still working and own no more than 5% of the company by which you’re employed, you are permitted to put off withdrawing from your 401(k) until you retire.

If you fail to make the required withdrawals by the deadline, you will incur a 25% penalty on the amount that should have been withdrawn. You will also pay the income tax due on the withdrawal.

Take Advantage of the Downsizing Safety Net

If you are considering downsizing in retirement by selling your home, the IRS allows you to exempt from your income up to $250,000 of capital gains on the sale of your abode if you are unmarried. The exclusion increases to $500,000 if you are married.

This means if you purchased a house 40 years ago for $100,000 and sell it today for $350,000, you probably will not owe any of that gain to the federal government. There are conditions, however. The house must have been your main residence, and you must have owned it for at least two years. You must also have resided in it for two of the five years before the sale — although the occupancy period needn’t be consecutive. You will not be eligible if you have excluded a capital gain from a home sale within the previous two years.

Be Mindful of How You Sell off Assets

If you sell an asset such as a piece of art, mutual fund, or stock, you will be liable for capital gains tax on the profit. The amount of tax you owe will depend upon when you first bought the asset. If you had the asset for more than a year, the Internal Revenue Service will tax the profit at the long-term capital gains tax rate, which is more favorable. On the other hand, if you sell the asset within a year of buying it, that transaction will be considered a short-term capital gain and will be taxed as regular income.

As you can see, there are many ways to lower taxes on your retirement savings to maximize your retirement dollars and enjoy your new life. If you are still unsure about your investing strategy, this retirement calculator can help you figure it out.

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