Image: Mature couple calculating expenses © Abel Mitja Varela, the Agency Collection, Getty Images

As many seniors learn, retirement can be as stressful and frustrating a time as any when it comes to paying taxes. With 401ks and traditional and Roth IRAs, as well as Social Security benefits and working wages, there's plenty to calculate on a tax return.

So how can the retirement crowd cut down on their tax bills? Analysts say it starts with managing your money.

"Retirees usually have a bit more control over their tax situation than other taxpayers," says Steven Gershon, a director at the Kansas City, Kan., office of the accounting and financial services firm CBIZ MHM. "That's because they can decide how much they might need to withdraw from their retirement plans to keep their taxes low."

Delay, delay, delay

Most experts agree that delaying withdrawals from a 401k or traditional IRA until you are 70½ is best for taxpayers because it lets these plans grow tax-deferred. Taxes on withdrawals from these plans are eventually taxed at ordinary income rates, but that can increase by more than 10% if withdrawals occur before age 59 1/2.

This is where a Roth IRA can help, says Mike Scholz, the tax director at Wegner CPA. Funds in a Roth can be withdrawn by age 59 when needed, tax-free, if the account has been open for at least five years.

"If a retiree doesn't have a current Roth IRA, it's worth it to see if a rollover from an existing IRA or employer plan to one makes sense," Scholz says. "They have tax-free growth and tax-free distributions."

And having more than one type of IRA can help taxpayers when the required minimum distributions for these funds hit at age 70.

"RMD management is essential," says Lee Martinson, the owner of PGA Financial. "Seniors have to know to take advantage of the aggregate rule, which says that withdrawals from one can satisfy withdrawals from all your vehicles. That will lower tax bills."

One other tactic to lower taxes is to shift taxable income around to different types of lesser-taxed investment vehicles.

"Some methods are very popular, like family limited partnerships and things like trust life insurance annuities," says Alexey Bulankov, a financial planner at McCarthy Asset Management. "There are what's called Stretch IRA's to deal with estate taxes. Seniors should weigh the benefits of all."

Besides moving money, some retirees may consider moving to states like Nevada and Florida that traditionally have low or no income taxes. But Gary Duboff, the managing director of CBIZ MHM's New York City office, notes that "with the economic downturn, many states are enacting or thinking about new and higher taxes on residents. It's a common approach for many retirees to move, but unexpected changes in tax law could have an impact on planning."

Another problem for retirees on the move are gift and estate taxes. Many states -- 21 to be exact -- have not adopted federal rules excluding up to $5 million of estate tax assets. That could cost retirees and their heirs additional taxes if they relocate.

It's obvious, experts say, that retirees need to check out the tax laws of any new state they might want to move to.

A dollar earned . . .

Social Security checks are a welcome income for many retirees, but benefits are often taxed if a person has substantial additional income such as wages, dividends or interest.

No one pays federal income tax on more than 85% of benefits, but the combined-income threshold (for benefits and other income, like wages) is low for when the tax kicks in: $44,000 for couples and as little as $25,000 for some individuals. That means retirees ought to think about pushing back any extra income.

"Seniors should postpone taking discretionary income, like capital gains, to early January of a following year instead of December, if they can," says Larry Karmel, a partner at the tax specialty firm Metis Group.

"With the income threshold at 85%, delaying the income for a time makes the benefit dollar worth more than a dollar of other income," Karmel says.

For married couples, itemized deductions can help offset potential taxes on benefits, says Bulankov.

"Filing jointly may enable couples to deduct all or part of the long-term-care insurance premiums they pay for themselves if they meet certain IRS criteria, and help minimize benefit taxation," Bulankov explains.

Looking ahead

If retirees find the tax burden heavy now, it could get heavier with tax reform. Some proposals include flat taxes, with the elimination of taxation on dividends and interest. But that could mean higher rates on wages.

Expiration of the Bush tax cuts, set for the end of 2012, could raise rates on dividends from 15% to 39.6%, hitting regular income that many seniors depend on.

Meanwhile, taxes are going up in 2013. The health care bill passed in 2010 adds a 3.8% tax on investment income, including interest, dividends, capital gains and other unearned income, for individuals with modified adjusted gross incomes above $200,000 ($250,000 for married couples). And there will be a 0.9% increase in Medicare payroll taxes for the same income levels.

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With all this in mind, some tax analysts worry that retirees aren't prepared for their senior years.

"The cost of retirement has grown, and many people have not saved enough," says Lee Isaacson, a CPA with the accounting firm Reznick Group. "They need to budget their costs and understand that taxes are now part of their responsibility, and start making estimated payments where, as an employee, they didn't have to."

In the end, experts say, cutting down a tax bill takes work.

"Plan ahead for taxes as much as planning for a vacation," says Scholz. "A little tax planning now can produce enough tax savings to actually pay for a trip."

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