There are many expenses that tend to be stressful for retirees. The healthcare sector is great as it can eat away with a lot of income. The same goes for homes. But an expense that really tends to catch seniors is nothing but taxes.
There is a big misconception that retirees are largely out of the hook when it comes to paying taxes. Not so. Retirees must pay taxes on traditional pension schemes, pension income (most of the time) and part-time earnings.
If you are worried about paying taxes in retirement, there are several things you can do to lower that burden and screen more of your income from the IRS. Here are three to begin with.
1. Store in a Roth IRA or 401 (k)
Traditional IRA and 401 (k) s provide an immediate tax break to make contributions since they are funded with dollars before tax. Roth IRAs and 401 (k), however, are not.
But while traditional IRA and 401 (k) withdrawals are taxed on retirement, the Roth plan withdrawals are tax-exempt, meaning that by passing a tax on the front, you buy yourself the opportunity to pay less tax in the future . This is a particularly wise move if you think you will be in a higher tax bracket for retirement than you are today (say, because you accumulate a large amount of savings).
2. Load municipal bonds
Bonds are generally considered to be a good investment for the elderly, as they are subject to less volatility than stocks. But bonds come in a number of forms, and from a tax point of view it pays to favor municipal bonds.
Municipal bonds are those issued by cities, states and counties. They work in the same way as corporate bonds: You invest a certain amount in advance, agree to lend it to the issuer over a predefined period, and collect half-yearly interest payments until your bonds come due and your principal is repaid. These two-year interest payments can serve as a solid income stream for retirement, but as with most forms of income, the IRS is entitled to a share of the money if it is collected from corporate bond issuers. The advantage of buying municipal bonds is that their interest is always exempt from federal taxes, and if you buy bonds issued by your home state, you also do not have to pay any state or local tax.
3. Moving to a Non-Social Security State
Low-income workers can often avoid federal taxes on their social security schemes, while middle-to-high-income seniors are often subject to federal taxes to some extent. But it's not just the federal government that can tax the benefits. Some states also impose a tax on them, so you can move where not to help you avoid losing money.
There are 13 states that currently have social security benefits:
- Connecticut 
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
of these states offers an exception that allows low or medium-sized households from the hook for tax. But Minnesota, North Dakota, Vermont and West Virginia offer no exceptions.
Of course, you shouldn't just pack up and move to a state that doesn't tax social security until you see what the cost of living is like there. In some cases, it is worth losing some of your tax benefits if that means enjoying cheaper rentals, goods and services locally. But from a strictly fiscal perspective, living outside of the above 13 countries is a good way to lower the pension burden.
Tax is a drag at any time of life, including retirement. If you want to avoid paying them as a senior, save money on a Roth account, serve municipal bonds over corporate, and choose your home state carefully. With some luck, it will make the art of keeping the taxman away from your money.