Of course only death will bring a complete freedom of taxes. Things like gas taxes, excise taxes, property taxes, sales taxes, and all the rest mean that even if I can largely avoid income taxes, the tax man with still cometh in one way or another. This doesn't mean that I'm not going to try my best to avoid as much of the tax man's (or woman's) wrath as possible in retirement.
I work hard for my money, and I'm going to continue to work hard to keep as much of it as possible. And while this might not result in a completely tax-free retirement, I'm going to do my best to make it at least a tax-reduced retirement.
Keeping costs (and debt) down entering retirement
We've gotten quit good at keeping costs down over the years. According to creditloan.com, the average American's interest payments on debt is $600,000 over the course of a lifetime. One way in which we avoid paying more than we have to is by doing things like avoiding credit card debt, paying off our student loans in under four years, and having downsized our home so that we can own without a mortgage. Otherwise, we do things like shopping at resale shops for many clothing needs, using stores like Aldi and Wal-mart to keep our grocery costs low, and driving an older vehicle rather than buying new.
The ability to maintain such cost-reducing activities will hopefully help us keep costs lower, and in turn enable us to live on a lower income, which would reduce our tax liability in retirement.
Taking Social Security benefits earlier
We've paid for our Social Security benefits, so we figure, why not use them? I recently wrote an article entitled "Ignore the 'Wait Until You're 70' Retirement Advice" that illustrates how taking such benefits earlier in life, rather than waiting, could actually be beneficial under the right circumstances. By relying upon these benefits ahead of other taxable income sources for part of our retirement support, we can again keep our income tax bill lower.
Gauging income and knowing tax structure
Who knows what the tax code will look like by the time we get to retirement. However, I've done my own taxes since I was a teenager, and I have a pretty good feel for the income tax structure. Knowing things like tax bracket levels, available deductions, exemptions, and credits, what is taxable income and what isn't, and similar tax-related rules helps me pre-determine how much we can earn without having to pay income tax on it before we actually earn it. This way I can determine from where our income should derive and in what amounts.
Spreading things out
The main part of my aiming for a tax-free retirement plan comes with spreading things out. By utilizing a mixture of taxable income, tax-free income, and savings, I hope that my wife and I will be able to utilize taxable income (from things like part-time work, pre-tax retirement contributions, dividends, etc.) up to the maximum amount of tax-free earnings (after deductions and credits), then utilize things like Social Security benefits and finally cash savings to make up any difference between expenses and income.
In this way, we hope to maximize income while minimizing how much in taxes we must pay, thereby making most effective use of our retirement savings and income streams.
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The author is not a licensed financial or tax professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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