You may think that in retirement, you don't have to worry about taxes because you're no longer in a traditional job, but that's not true. If you don't think about your tax situation and plan strategically, you could end up paying more tax than necessary at a time when you should be saving your income.
Find out: 9 strategies Americans use to minimize taxes on their retirement savings
Read next: 4 genius things wealthy people do with money
Derek Mazzarella, a certified financial planner (CFP) and retirement advisor with Gateway Financial Partners and author of Just Retire Already, explains four reasons why you could be overpaying taxes in retirement.
Investments not optimized
The first area where Mazzarella sees retirees overpaying taxes is what he calls “the tax haven of investments.”
Many retirees put the interest they earn from bonds in an investment account, where they pay tax on it at ordinary income rates, he explained.
“if you [those funds] “When you put assets in a retirement account, you can delay paying tax on them, so by putting the right types of assets in the right accounts, you have the opportunity to defer taxes and minimize your taxable accounts.”
Ultimately, you want to have more individual stocks and ETFs in your investment accounts and more interest-earning assets in your retirement accounts, he said.
MORE: 7 things not to do if you owe the IRS
Do not hold multiple tax-advantaged accounts
Another way people pay too much tax in retirement is not saving in a combination of three tax-advantaged accounts, he said.
“There are a variety of tax strategies you can use depending on your needs. You can use a combination of Roth IRAs, traditional IRAs and investment accounts. [is important] Because when you have all three of those things, you can pretty easily manipulate the tax brackets.”
For example, if you need more income in a given year, you can withdraw more from your Roth IRA and pay less tax, he said.
Start spending from a taxable account
Another way retirees can pay too much in taxes is if they decide to spend from a taxable account, such as a traditional IRA or 401(k), first and from a Roth IRA last, he said.
“But generally, a combination of the three will be helpful at some point in retirement.”
Plus, if you're able to postpone taking your Social Security benefits, you may be able to do a Roth conversion, he said.Roth conversions are ideal when your income, and therefore your tax bracket, is low — the first few years of retirement, Mazzarella said.
Once you start taking required minimum distributions (RMDs), it may make more sense to withdraw money from a 401(k) or traditional IRA, he said.
Determining whether and when to do a Roth conversion is part of a discussion you should have with your accountant or financial planner, he contended.
“When the market is down, a Roth conversion is ideal,” he says. “Any advisor will tell you to just wait for the growth. Now, the growth is coming back, the market is recovering, and the growth is tax-free.”
Does not take into account real estate depreciation and other discounts
Another way you can overpay tax is forgetting to deduct depreciation on your home or investment property on your tax return.
But one word of caution on that front: He said he advises clients to get their home appraised if a spouse has passed away.
“That way, clients can increase the value of their home by half.”
Finally, he said some cities and counties offer discounts, such as reduced property costs, to residents over a certain age or below a certain income threshold, so be sure to research and apply.
Does not consider the tax impact of Medicare premiums
Finally, something that may not seem tax-related, but he thinks is tax-related, is Medicare premiums.
“I also consider Medicare premiums a tax because they're based on how much income you earn,” he said.
Roth IRA funds, real estate loans and life insurance are not included in the calculation of Medicare premiums, so if you are in three tax brackets, “you can reduce your Medicare premiums by manipulating your tax brackets to stay below the lowest tax bracket.”
However, if your income for the past two years was significantly higher than your retirement income, or if there has been a death or disability in your family, you can fill out an IRS form to dispute that your Medicare premiums are based on that income.
Being proactive with your retirement accounts can help you reduce the amount of tax you pay and keep a larger portion of your income.
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This article originally appeared on GOBankingRates.com: I'm a Financial Advisor: 5 Reasons You're Paying Too Much Tax in Retirement
