How to Reduce Your Tax Bill by Saving for Retirement

All right well we bring up that old cliche quite frequently that there’s only two certainties in life, death and taxes. And here at Centennial Wealth Advisory we like to think of many different ways that we can reduce your tax liability. And in fact, there’s a bunch of different ways to reduce your tax liability while still saving for retirement. So let’s go over those today, okay? So the first one is maximizing your contributions to your 401K. Okay so for the year 2023, your max contribution is $22,500. So okay if you can afford to max that out and let’s say you’re in the 24% tax bracket, you’re going to reduce your tax bill by about $5400 by maxing that out. But let’s say there’s even another option. So you’ve got the 401K going for you. Well why not add an IRA, okay? So in the year 2023 the max IRA contribution is $6500. So if you can max that out as well, well you’re going to reduce your tax liability by about $1560 a year. So there’s two great ways that you can save for retirement and reduce what you’re paying Uncle Sam. Another option that I found for a lot of clients is maybe one client is working and the spouse is maybe a stay at home spouse and thinks they don’t have the ability to contribute to a retirement account. Well that’s just not the case. Okay, so you could open up what’s called a spousal IRA. And that’s for those spouses that they don’t have earned income. Okay, and by doing that you increase the max that you can contribute to an IRA from $6500 a year up to, you just multiply it by two. So $13K a year. So that’s even more savings that you can get by continuing to invest for your retirement. Now another option that you have is by doing what’s called a Roth conversion. Okay so the Roth conversion you know typically when you’re in your working years, you’re going to have a little bit higher income, okay? So you might want to avoid doing those Roth conversions. But let’s say that it’s an off year. And let’s say that you don’t have as much income and you’re in that lower tax bracket. Maybe you’re in the 12% tax bracket. That would be a great time to get Uncle Sam out of your pocket and do those Roth conversions to maximize that 12% tax bracket. Now that is not really saving you money on taxes, right, but it could be. Okay where are tax rates going from here? Maybe they’re going up. So when you get to retirement, if you’re forced to take money out of that IRA which you will be at age 73, where do you think tax rates are going to be then versus now? So that’s why you could make a case to doing those Roth conversions in maybe an off year in your income when you have lower income to maximize whatever tax bracket you’re in. Also another great example of maximizing those Roth conversions is you know I had a recent couple where they were both going to have pension in retirement, plus Social Security. So they had a unique situation where their income in retirement was actually going to be more than while they were working. Okay, that’s a great situation for them. But that also opened up some tax planning opportunities for them as well. Because we knew okay, when they retire and when they get to age 65, they were going to actually be in the 22% tax bracket. Even though while they were working they were only in the 12%. So it made the most sense to right now maximize that 22% tax bracket by doing those Roth conversions knowing that when they retire and when they’re both on Social Security and on their pensions, that they’re going to be in that 22% tax bracket anyway. And again, where do we think that 22% tax bracket is going to be in the future? Well who knows? But most likely it will probably be up higher, right? It will probably be back to the 25%. But again, that’s not set in stone. So there’s multiple different ways that you can go about saving for retirement, but also reducing your tax obligation. So don’t forget, options are max out that 401K contribution. Max out your IRA contribution. Maybe do a spousal IRA contribution if you can and consider those Roth conversions if you have some wiggle room in that tax bracket.