6 Tax Tips to Enhance Your Retirement
Nobody likes having to pay taxes, especially during retirement. Retirement is meant to be a time when your life shifts from working to leisure. Here are 6 tips to help you keep more of your hard-earned retirement fund.
Increase Your Standard Deduction
If you are retired or soon to be retired, then your standard tax deduction might be higher than you think. Past the age of 65 the standard deduction rate goes up to $14,050 vs $12,200 for those younger than 65. That's a nice extra amount for you to put towards your passions or even a trip.
Couples can benefit from an additional $1,300 tax deduction if one member is 65 or over, and $2,600 if both are over 65.
Keep Funding an IRA
If you are retired but your partner is still working they can put up to $7,000 into your IRA a year. They can do so until you reach 70 years and six months old. If you have a Roth IRA then there isn't an age restriction applicable.
If you don't need any major repairs, use this refund to do any annual maintenance such as hiring someone to clean out your HVAC system or do an inspection. This allows you to catch potential problems before they actually become serious. It's better to fix them now while they're small and affordable.
Convert Your Retirement to a Roth IRA
This tip is for those that have yet to retire, but one to get a head start on planning for it. Converting your current retirement plan to a Roth IRA is one of the best things you can do to make sure that you get a tax break once you are retired, as Roth IRAs are pre-taxed, so you don't have to worry about them down the line.
Invest in Qualified Dividends
Dividends are one of the best ways to get paid once you are retired. They are easy to understand and companies that pay dividends tend to continue to pay a consistent dividend, independently of stock price. This allows for a more secure investment. More importantly, if you invest in qualified dividends, they are taxed at a rate of between 20% to 0% based on your tax bracket. That allows you to have another income stream that is not heavily taxed, or taxed at all. Additionally, in determining your tax bracket, the income used for calculations are off your taxable income, so if you invested in the Roth IRA mentioned above, your tax rate will be minimized.
Look at Long Term Municipal Bonds
Most bonds incur both federal and state tax on the income earned from the investment. However, this is not the case with municipal bonds. These are bonds issued by the state or other government agencies. They are normally tax-free federally and on a state level, if you are a resident of that state. You can invest in them individually, but you can also look at investing in an ETF or municipal bond fund, which provides you some diversification.
Deduct Medical Expenses
If you've retired and you incur unreimbursed medical expenses that are more than 10% of your adjusted gross income, then you can claim the money over that threshold back on your taxes. You will have to itemize the claim, which can be tedious, but if the amount is higher than the bundle deduction you would otherwise get, then it will be well worth it. Remember other deductions include mortgage interest and state/local taxes as other major ones.