Serving Florida first responders since 1999.

Minimizing Taxes in Your Retirement Year

Learn key strategies for minimizing your taxes in your retirement year, including timing the date of your exit, timing of your withdrawals, when and how to utilize tax-advantaged accounts, social security timing, Roth conversion strategies and more.

Key Points

1
Timing Is Key:Everyone’s situation is different. Generally speaking (which we don’t like to speak generally) it's better for tax purposes to retire earlier in the year rather than later. But you shouldn’t let the tax tail wag the dog.
2
Maximize Benefits:Maximizing your benefits is the #1 solution to minimizing your taxes.
3
Tax Bracket Management:We guide you through controlling and minimizing your annual tax exposure to the greatest extent possible.

Table of Contents

Minimizing taxes in your retirement year can be quite tricky. While many people are concerned with minimizing their taxes (who actually likes to pay more than they have to?!) and will follow the generalized statement that, “retiring earlier in the year is better than later in the year from a tax standpoint”, when you truly understand the way personal income taxes work, this may not be the best advice. The truth is, everyone’s situation is different. There are so many factors at play.

Top 10 Factors That Determine Into Your Retirement Date

Income the Year Before
Tax Deferral
Owning a Business
Lump Sum Payment
Spouse’s Retirement Date
Retirement Income
FRS Pension or FRS Investment
Your Dependents
Age & Tax Exposure
Active-Status Real Estate Professional

The reality is that the only way to determine the best time to retire is by understanding how all of these factors impact that decision. In order to make the right decision though, it’s important to understand how tax brackets work – they are incremental.

Many people think that when they “hit the next tax bracket” that it forces them to pay a higher tax rate on all of their income. This is not the case. Just take a look at the examples are below at $250,000 in household income and $450,000 in household income:

*All taxes means federal income taxes, FICA, social security, and Medicare.

What this means is that in nearly all cases (there are limited exceptions) working with us to MAXIMIZE your benefits is the #1 solution to minimizing your taxes. Meaning… that while your taxes may not actually be lower, receiving/earning MORE money and paying slightly more in taxes is nearly always more beneficial than earning less and paying slightly less taxes. This is why you shouldn’t let the tax tail wag the dog, so to speak.

Key Strategies for Minimizing Taxes in Retirement

Now, once we understand where you and your family are at with regard to points #1 to #10, we have helped you MAXIMIZE your benefits with your employer and your income, AND we have determined that tax deferral is best (because you’re likely to pay at a lower tax bracket in the year you retire, rather than the future based on your income plan).

Then, we can help you plan to save taxes using some of the following strategies:

Maximize Deferral

Contribute the maximum allowable amount to your 457(b) + catch up contributions available. Currently $23,000 + $7,500 if you are over age 50 (total of $30,500 for each of you and your spouse or potential $61,000) or leverage the “Three-Year Catch Up Provision” to put $46,000 annually away + a spouse over age 50 would provide for a deferral opportunity of $76,500 ($46,000 + $30,500) or $92,000 if both are eligible for the “Three-Year Catch Up”.

2024 Three-Year Catch-Up Provision:

The three-year catch-up provision is beneficial for those nearing retirement who want to maximize their retirement savings.

Contribution Limit: Under this provision, you can contribute up to twice the annual limit in the three years before your designated retirement age. The three-year catch-up contribution limit is calculated by the plan administrator, considering your past contributions and eligibility. For 2024, this means you could contribute up to:

  • $46,000 (2 x $23,000) per year during each of those three years.

Eligibility: The three-year catch-up is only available to participants who have not contributed the maximum amount in previous years. The additional contributions are limited to the unused amounts from prior years when the participant did not contribute the maximum allowable amount.

Contribution Guidance: Contribute the maximum allowable amount to your spouse’s 457(b), 401(k), 403(b) or Traditional-IRA.

Something to Think About

Maximize Deductions

For those with large payouts, maximizing itemized deductions in your retirement year can reduce taxable income. This could include medical expenses, property taxes, and charitable donations. Click here to see the top 10 tax deductions commonly available to retirees.

Charitable Contributions

Consider “bunching” deductions, donating appreciated assets (instead of cash) or using a Donor Advised Fund to pre-fund future charitable contributions to reduce your taxes.

If you own a business…

Planning to purchase a new retirement vehicle? Consider purchasing a vehicle over 6,000 pounds and creating a tax deduction out of it using a Section 179 deduction. Here’s how it works.

Investment Property as a Real Estate Professional

Consider purchasing an investment property and utilizing a cost segregation study to use accelerated and/or bonus depreciation to create a tax deduction, especially if you are a real estate sales agent, general contractor or in real estate trade or business as a side business (or your spouse is when filing jointly) Click here for an explanation of how it works. Note: AWP has relationships that can help you implement this strategy, so that you can benefit, but not have the full responsibility for the management of the property.

Final Word

By implementing these strategies, you can better manage your tax liabilities and ensure a smoother financial transition into retirement and even better, maximizing the money you and your family keep in your pocket!

There are other strategies that may be available depending on your individual scenario. Contact AWP to better understand your options.

Share:
Tags
Keep Reading
Finding Your Optimal Retirement Age
Turning Investments into a Retirement "Paycheck"
Covering Healthcare Costs in Retirement: A Guide for Florida Retirement System Members
Table of Contents
Our free retirement assessment checks all the boxes.

GET OUR FREE GUIDE:

Learn what to look for in a financial advisor with this free guide and companion checklist, designed for first responders.

Your information will never be shared with a third party.

By submitting this form, you agree to receive emails from Atlantic Wealth Partners, LLC. You can unsubscribe from these emails at any time by using the link at the bottom of every email.