A charitable bequest can escape taxation.

A charitable bequest can escape taxation. Credit: iStock

There's a quiet threat facing baby boomers' retirement plans: future tax liabilities.

The generation that has depended solely on 401(k)s and tax-deferred individual retirement accounts may not realize how much of a tax hit it will take when it starts withdrawing the money and living on it.

With the prospect of rising tax rates after the Bush tax cuts expire, some retirees could find themselves paying even more in taxes than they did when they were working.

How to reduce that tax bite? Here are a few options.

1. Build a tax-diversified portfolio. If all your savings are locked away in a 401(k) or tax-deferred IRA, you will end up paying income taxes on all your withdrawals. It's better to have a tax-deferred account, a tax-free account (such as a Roth IRA or a health care savings account) and a regular taxable investment account. You can use the taxable account to take capital losses as they occur, and to keep income taxed at lower capital gains and dividend rates.

2. Find youir income segment. Know your tax bracket and whether you are on the verge of being in a higher or lower bracket. For example, the 25 percent federal tax bracket starts at $35,350 in income ($70,700 for couples filing jointly) and runs all the way up to $85,650 for single filers and $142,700 for joint filers. If you have multiple accounts, you can finesse your withdrawals to keep your marginal income below a bracket line.

3. Timing is everything. Consider taxes as you decide when to start your Social Security benefits. That's a complex consideration, so it's best to have an expert with a spreadsheet help you.

4. More taxes ahead. Don't forget about the effect of Social Security taxes. It is likely that you will have to include a portion of your Social Security benefits into your taxable income.

5. Optimize what you put where. That means putting your bonds in a tax-deferred rollover IRA (or tax-free Roth) and putting your stocks in a regular taxable account.

6. Don't forget muni bonds. Interest on municipal bonds is typically not subject to state and local taxes, so folks in high-tax states might find these bonds or the mutual funds that hold them attractive. If you are going to invest in munis for income, don't put them in a tax-free or tax-deferred account.

7. Where you live matters. It's not just the cost of living that makes some places, such as Florida and Delaware, retiree magnets -- it's the fact that those states have much lower state tax structures. Florida has no income tax at all.

8. Perspective is key. Remember not to let the tail wag the dog. You can have a richer retirement life if you keep taxes to a minimum, but -- of course -- taxes shouldn't be the driver in how you invest, where you live, or how you run your life.

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