This tax season was the first in which Charlie Clark, 64, filed his return with his newly attained status: retiree.
When he ran the numbers through TurboTax last month, he was pleasantly surprised. "This year, holy cow, we were in the 15 percent tax bracket for the first time in probably 30-something years," said Clark, who retired after a 40-year career in the oil and gas engineering industry. "That is pretty sweet."
When the paychecks stop coming, minimizing the tax bite becomes even more important. There are several strategies that can help, but they are not always obvious.
Manage tax brackets: You will need different types of retirement accounts to work with, including a traditional 401(k) or IRA (tax-deferred), a Roth IRA (money is withdrawn tax-free) and taxable investment accounts. That way, you can strategize about what to draw from in a given year and better manage how much of your income is taxable.
One approach is to simply start spending down traditional IRA accounts first — perhaps while delaying taking Social Security. By doing that, the eventual required minimum distributions will be lower.
For those who need more than the minimum distribution to cover expenses, one way to keep taxable income down is to make withdrawals from a Roth IRA, or a brokerage account, paying capital gains only on the profit.
Roth conversion: To add more of those levers, retirees might consider converting a portion of a traditional IRA account to a Roth IRA. Taxes will be due on the amount converted, which is why this is best done when you're in a lower tax bracket, perhaps before turning to Social Security.
There's room for many retirees in the 15 percent tax bracket to convert the money. While the upper limit on taxable income of the 15 percent bracket is $37,450 for singles and $74,900 for joint filers in 2015, in reality, many can remain in that bracket and still earn much more.
Figuring out if a Roth conversion makes sense requires detailed analysis, including making certain assumptions about the future direction of tax rates. The good news? If you get it wrong, you have until the due date of the return (including extensions) to reverse the transaction.
Roth IRAs don't require account owners (or spousal beneficiaries) to take minimum distributions — at least under current law — making the accounts also a good place to leave money to heirs.
Pay $0 in capital gains: Long-term capital gains are not taxed for people in the 10 and 15 percent tax brackets, which means many retirees will have opportunities to pay nothing at all.
Charitable deductions: Charitably inclined taxpayers nearing retirement — who also itemize their deductions — might consider making two years of donations right before they stop working (while they are still in a higher tax bracket). But instead of donating directly to the charity all at once, you can parcel it out over a few years by parking the money in a donor-advised fund.
Medical deductions: While it has become more difficult to deduct medical expenses, people 65 and older have an advantage in 2015 and 2016: They can deduct medical and dental expenses that exceed 7.5 percent of their adjusted gross income. After 2016, the floor will rise to 10 percent.