5 of the Most Effective Ways of Reducing Income Tax in Retirement

5 of the Most Effective Ways of Reducing Income Tax in Retirement

Taxes are a fact of life. Those who are still working live in hope that their tax burden will diminish following retirement. Nevertheless, taxes are a significant expense that most of us will still have to deal with.

After people retire, their income usually decreases since they no longer receive a salary. Many of today’s retirees are reliant on multiple income streams. It is important to monitor these carefully to minimize post retirement tax liabilities.

In this article, we look at five strategies to reduce post-retirement income tax burdens, helping retirement income and savings to go further.

1. Pay off your mortgage pre-retirement.

Paying off the mortgage pre-retirement effectively eliminates the largest bill of most households. Free from that, retirees will benefit from vastly increased flexibility.

Unfortunately, more and more people are carrying over their mortgage into retirement. For those withdrawing large amounts every month to make mortgage payments, it is difficult to minimize taxes.

2. Reduce your non-mortgage expenses.

By eliminating or decreasing unnecessary monthly financial obligations, retirees are able to withdraw less from their retirement funds. By keeping expenses modest, retirees should be able to live within the 15 percent tax bracket, which confers numerous tax-saving advantages.

3. Minimize the tax you owe on your Social Security benefits.

Social Security is taxed according to combined income, i.e. adjustable gross income, plus nontaxable interest, plus 50 percent of Social Security benefits. Married couples filing jointly whose combined income falls below $32,000 are not liable for taxes on Social Security benefit payments.

Individuals incur higher tax liabilities on their Social Security benefits as their income increases. This underlines the importance of keeping expenses low. You can then keep your income low, helping to minimize tax on Social Security benefit payments.

4. Diversify your post-retirement income streams.

From 401(k) plans, to Roth IRAs, to foreign grantor trusts, it is critical to diversify post-retirement revenue-generating sources. Today’s retirees often rely on a combination of pensions, Social Security, taxable brokerage accounts, rentals, bonds, savings accounts, and many other asset forms.

These incomes may be fully taxed; partially taxed, as in the case of Social Security Benefit; or taxed at the long-term capital gains rate. Sticking within the 15 percent tax bracket helps individuals to minimize their tax liability, potentially for years to come. Individuals can increase their options significantly by investing strategically during their working lives.

5. Investing in a Malta Pension plan.

The IRS imposes federal taxes on top-earners at a rate of 39.6 percent. Unlike the citizens of any other country in the world, Americans are taxed irrespective of where they live. However, US international tax planning is currently intent on eliminating or minimizing federal income tax on income earned abroad, supporting repatriation of foreign earnings at the lowest possible rates.

A special US-Malta income tax treaty has created favorable conditions for US taxpayers investing in a Malta Pension Plan, effectively matching Maltese law. Under Maltese law, pension payments do not incur income tax liabilities. This makes Malta Pension Plans an effective vehicle for achieving substantial tax savings post-retirement.