How to pay the LEAST Amount of Tax On IRAs and 401ks

If you’re 50 or older, this is going to help you pay the least amount of tax over your lifetime. Most people don’t figure this out until it’s too late, and then they’ve missed an opportunity to do this, but you’re here so you’ll have some options.

One of these strategies is best if you’re between 50 and 72, and the other is best if you’re over 70. Let’s get into it.

Time Is On Your Side

If you’re between 50 and 70 and you’re getting serious about planning your ideal retirement, and you like the idea of not paying more tax than you need to (or really not paying any tax on IRAs in the future), there are two routes you can take.

But first, if you’re still working, the first step is to take a look at your tax rates now and then look at the projection of what they could be in the future. I like using the DIY retirement plan or my favorite retirement calculator to help figure this out. You could find that simply upping the contribution to your Roth portion of your 401(k) or maybe your Roth IRA makes sense for you.

You might be thinking, “Well, I’m in a high tax bracket right now as I’m earning an income and I’ve got a wage, so it’s going to be lower in retirement.” Remember that time is on your side.

If you put 10K into a Roth now and your effective tax rate was 20%, you missed out on 2K of tax deduction this year, but let’s say that that 10K grows to over 30K over the next 15 years. That 30K is in a traditional IRA, and even though your tax rate might be lower in retirement – let’s say 10%. If you were to take that out in retirement, you might pay 3K in additional tax. 

Even with all this info and these ideas on what to do, there’s a lot of factors that are unique to you and that you should evaluate before doing anything like this. I do recommend meeting with a financial professional. 

Are You in a Roth Conversion Sweet Spot?

The second thing to do if you’re still working is think about upping your non-retirement accounts. Not adding to your Roth, not adding to pre-tax 401(k), but think about the non-retirement accounts. If you can build up a substantial non-retirement account and are not working or you’re close to not working, you may be in that Roth conversion sweet spot, which just means that once your income goes away, your taxable income may be very close to zero. If you haven’t started social security or you can hold off taking your IRA distributions, this could be a good time to convert to Roth.

Let’s move onto the next one.

If You Don’t Want to Pay Mandatory Distributions

If you’re between 50 and 70, this one is still important because even though you’re not 70 now, or you’re not required minimum distribution age yet, you will be in the future.

Retirees at or above the required minimum distribution age (72) right now have to take out mandatory withdrawals from their pre-tax accounts (i.e. IRAs, 401(k)s, 403(b)s). Even if they don’t need the money, they still have to take it out. I kind of look at this as the government saying, “We gave you these years of tax deferral where you didn’t have to pay tax on the income and the capital gains and things like that. Now it’s time to pay up.“

They want you to take money out and start paying tax on it. If you’re getting close to RMDs and don’t want to pay tax on mandatory distributions because you don’t need them, and you could see yourself wanting to help out a charity or a cause that you care about, you can actually avoid paying tax on some or all of that RMD if you send it straight to the charity. It just has to be a 501(c).

Now, if you don’t take your RMD out in the year that you’re supposed to, you could get penalized up to 50% of that year’s distribution. This is called a qualified charitable deduction. Just make sure that you talk to your tax preparer or CPA to make sure everything is recorded correctly on your tax return.

As always, reach out to us with any questions you may have.

If you found this helpful, check out these additional resources:

Find Out When Roth Conversions Could Make The Most Sense

Little Known Tax Strategy For Retirees. Tax Planning Strategy In Retirement

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