Regardless of what your budget is going to be after you retire, you want to maximize the amount of money that you keep and minimize the amount of taxes that you have to pay. Knowing how to handle savings plans and your home can help ease your tax burden down the road. Also, there are important differences for retirees in federal and state taxes.

Savings Plans

When saving for retirement you need to plan with the impact of taxes in mind. A traditional 401k or IRA will give you a tax break at the time you contribute to it. While this might provide a current advantage by reducing your tax burden, you will have to pay taxes on the money when you take it out. On the other hand, when you contribute to a Roth 401k or Roth IRA you pay the taxes when you put the money in. Then, when you take the money out, both it and the interest received will be tax-free. The decision on which path to choose depends entirely on your present needs and financial situation and what you anticipate in the future.

Your Home

When you retire, find out whether the property taxes you pay on your home will be affected. Some places give retirees a discount on their property taxes which is often called a homestead exemption. Senior citizens often receive a higher homestead exemption amount than younger property owners. If you are moving, determine if you can benefit from the federal capital gains exclusion so that you do not have to pay taxes on all or part of the profit from the sale of your old house. Your real estate broker should be able to help you figure out if you are eligible for this exclusion.

Federal Taxes

Just because you retire doesn't mean you get to stop paying taxes. The federal government will look to any form of income, including pension and investments, to establish your tax liability. There are things you can do to reduce your tax burden, including paying taxes on money you invest when you invest it. Even your Social Security benefits may be taxable as income depending on what your adjusted gross income is for the tax year.

State Taxes

Retirees should think about where they would like to live and how that could impact them financially. Many states do not tax Social Security income. Also, several states do not tax your pension or only tax a portion of it. Some states allow higher personal exemptions for elders. Additionally, there are a few states, like Nevada and Florida, which have no state income tax at all.

While living in a state that will not tax your income may be attractive, do some research before moving. Know what your budget is and whether or not the savings in tax will make a substantial difference in your lifestyle. The cost of living can vary greatly from place to place. There are other factors to consider as well including climate, availability of quality healthcare, availability of public transportation and presence of friends and family. Also carefully examine the realistic costs of moving, including buying a new house and packing and transporting your belongings.

The best thing to do is get as much information as you can from your attorney, broker or accountant to help you keep the money you earn regardless of whether you are 65 or 35.

Questions for Your Attorney

  • What would be the tax advantages to me in moving to another state?
  • How do I protect my family from paying high taxes after I die?
  • How can I find out what exemptions I am entitled to with regard to property taxes?