Taxes don't end once you retire, but there are strategies, tax credits and deductions you can use to minimize your tax burden in your golden years. Understanding these rules and exceptions as early as possible is the key to reducing your future tax bill.
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According to U.S. News & World Report, here are numerous retirement-saving tips to help lower your tax bill.
1. Contribute to a Retirement Account
The Motley Fool pointed out that the average American thinks they need roughly $1.7 million to retire comfortably, according to a 2022 Charles Schwab survey. However, a Vanguard study revealed that the median retirement account balance is just $35,345.
Contributing to a retirement savings account, like a 401(k) or individual retirement account (IRA), can help lower your tax bill and you may be able to defer paying income tax on your savings until retirement. This is especially helpful if you think you will be in a lower tax bracket when you retire.
2. Make Catch-Up Contributions
Workers age 50 and older can make a catch-up contribution of $7,500 to their 401(k) retirement account each tax year. This adds up to a total tax-deductible contribution of as much as $30,000 compared to $22,500 for younger workers, says U.S. News.
IRAs also allow catch-up contributions for those age 50 and older of up to $1,000 in 2023. Older workers can also make a tax-deductible contribution of as much as $7,500.
3. Don't Forget Required Minimum Distributions
After age 73, savers are required to make withdrawals from IRAs and most 401(k)s. Income tax will be due on each traditional retirement account distribution, according to U.S. News & World Report.
If you don't take the minimum distribution, the penalty is 25% of the amount that should have been distributed plus income tax due. However, this could be reduced to 10% if you quickly adjust your distribution amount to the minimum requirement.
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4. Avoid Early Withdrawal Penalty
The amounts a retirement saver withdrawals from an IRA or other retirement plan before reaching the age of 59½ are called "early" or "premature" distributions, the IRS noted. A 10% early withdrawal tax applies unless the retirement saver qualifies for an exception. Exceptions include purchases toward college costs or medical expenses.
U.S. News & World Report added that you may be able to access funds that you contributed to a Roth IRA without paying a penalty if the account is at least five years old. If earnings are taken out before the five-year rule, you may have to pay income tax on those withdrawals, CNBC reported.
5. Delay 401(k) Withdrawals if You're Working
If you're working in your 70s or later and don't own 5% or more of the company sponsoring the retirement plan, some 401(k) plans allow you to delay withdrawals until you retire, according to U.S. News & World Report. You must still take required minimum distributions from IRAs and 401(k) accounts from any previous employers after age 73 to avoid the 25% tax penalty.
6. Claim the Saver's Credit
The IRS allows retirement savers to take a tax credit for making eligible contributions to their IRA or employer-sponsored retirement plan. Savers who earn up to $36,500 for individuals, $54,750 for heads of household and $73,000 for married couples in 2023 and contribute to a 401(k) or IRA are eligible for the saver's credit.
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According to the IRS, depending on your adjusted gross income, the credit is worth between 10% and 50% of the amount contributed.
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This article originally appeared on GOBankingRates.com: Retirement Saving: These 6 Methods Will Be Subject to Less Taxes