32% of older Americans wish they had better planned this retirement expense

There are certain expenses that are almost inevitable during retirement. You will need a roof over your head, a means of transportation, food and access to public services. It will also have to absorb the astronomical cost of medical care.

But while all these expenses may be obvious, here is one that tends to catch older adults off guard: taxes. In fact, in a survey by the US National Retirement Institute for adults age 50 and older who are currently retired or who intend to leave the workforce within 10 years, 35% did not include taxes in their retirement planning.

The result? A good 32% regret not having a better account from them, and 38% of future retirees are truly terrified of what taxes will do to their retirement income.

Senior man and woman with serious expressions at the table with laptop and documents

Image source: Getty Images.

If you’re concerned about the impact of taxes in your later years, here are some strategies to minimize that potential hit.

1. Keep your savings in a Roth IRA or 401 (k) account

Many workers are motivated to contribute to a traditional or 401 (k) IRA because they get an immediate tax exemption. Roth savings plans, by contrast, offer no upfront tax benefit. On the other hand, Roth IRA and 401 (k) withdrawals are taken tax-free in retirement, and that’s a huge advantage to enjoy as a senior. That way, any money you remove is yours to keep in its entirety.

2. Save for health care expenses in a health savings account

Although not everyone can participate in a health savings account (HSA), if you have a high deductible health insurance plan, you may be eligible. And if so, it’s worth funding an HSA, because not only do contributions go tax-free, but withdrawals are also taken tax-free, as long as they’re used to cover qualified medical expenses. That’s another source of retirement income that the IRS can’t touch.

3. Moving to a state that does not tax Social Security benefits

Many older adults are surprised to learn that their Social Security benefits are taxable at both the federal and state levels. But you can avoid the latter by retiring to a place that does not impose that tax. There are 13 states that tax Social Security income to some degree:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Of these, Minnesota, North Dakota, Vermont, and West Virginia are the only ones that do not offer an exemption for people with low or moderate incomes.

4. Generate tax-free interest income with municipal bonds

Investing in bonds is a smart move for seniors who want to continue generating income, albeit without the risks associated with stocks. And if you choose municipal bonds over corporate bonds, taxes will be less troublesome. The reason? The interest on municipal bonds is always exempt from federal taxes, and if you buy bonds issued by your home state, you will also avoid state and local taxes on that interest.

Just as taxes are generally unavoidable during your working years, they are also difficult to eliminate during retirement. But if you make the above moves, your IRS load may be kept to a minimum once your senior year begins.