You’ve been saving diligently for retirement, stashing funds in IRA’s and 401(k)s for a few decades and watching the power of compounding interest turn your money into far more than you ever imagined. Your house is paid off, your kids have graduated from college, and now you’re getting ready to distribute those dollars that you worked so hard to accumulate.

But how do you spend down those IRA and 401(k) accounts without giving more than your fair share to the IRS? After all, paying unnecessary taxes is a great way to run out of money a whole lot faster than you’d like.

Here are three tax mistakes that investors should avoid if they hope to wring every last bit of efficiency from their retirement dollars.

Mistake: Assuming you’ll be in a lower tax bracket in retirement

Our government’s debt has ballooned to $21 trillion, and the real spending has only just begun. About 78 million baby boomers are marching out of the workforce and onto the rolls of programs such as Social Security and Medicare. Boston University professor Laurence Kotlikoff puts the total unfunded costs of these obligations at $200 trillion. Do you think the federal government will be able to honor these promises without raising more revenue over the course of your retirement? Most economists say no.

It’s worth noting that 96% of our country’s nearly $22 trillion in retirement accounts is sitting in tax-deferred accounts like 401(k)s and IRAs. Taxes come due when you start withdrawing those funds. If tax rates go up, you could pay much more in taxes on those retirement accounts unless you get serious about shifting them to tax-free accounts like Roth IRAs today.Here’s the good news: with the tax cuts that President Donald Trump signed into law last year, you can convert those accounts to tax-free Roth IRAs at substantially lower tax rates. But be warned: those low tax rates expire Jan. 1, 2026. If you have just retired, this may be the optimal time to systematically shift those tax-deferred retirement plans to tax-free accounts. Even if you aren’t planning on retiring by 2026, the new tax bracket are so low and so expansive that it may make sense to pre-emptively shift some of your retirement dollars to tax-free accounts.

Mistake: Huge IRA and 401(k) balances that cause Social Security taxation

Here’s the scary part: any distributions (including required minimum distributions, or RMDs) from your IRAs and 401(k)s count as Provisional Income. The IRS adds these distributions to any 1099s you receive from your taxable investments and to one-half of your Social Security. If all that adds up to more than $34,000 for a single person or more than $44,000 for a married couple, then up to 85% of your Social Security becomes taxable at your highest marginal tax bracket.

Let’s say your Social Security tax bill ends up being $5,000. My calculations tell me that most retirees whose Social Security gets taxed will run out of money 5 to 7 years faster than those whose Social Security doesn’t get taxed. Why? Because the act of compensating for Social Security taxation forces you to spend down all those other assets that much faster. To avoid huge IRA balances that will invariably cause Social Security taxation, be sure to reposition some or all of your 401(k)s and IRAs into tax-free Roth accounts.

While it’s long been possible to convert traditional IRA accounts into Roth IRAs, recent legislation allows you to also convert your 401(k)s to Roth 401(k)s. The only catch is that you have to pay the tax out of an account other than the 401(k) itself.

Mistake: Not maxing out Roth IRAs and Roth 401(k)s while you have the chance

Every year that you fail to max out your Roth IRAs and Roth 401(k)s are opportunities that can’t be recouped. You also lose what they could have earned over the balance of your retirement. So, the real cost of failing to make a Roth IRA contribution can ultimately be measured in the hundreds of thousands of dollars. Even if you qualify for the tax perks of a traditional IRA today, it doesn’t make sense to get a tax deduction today at historically low tax rates if the tax rate at which you withdraw the money down the road will be higher.

If you find yourself with more than six months’ worth of basic living expenses in a taxable investment like a money market, savings account or CD, why not reposition up to $13,000 a year as a married couple to your Roth IRAs? You’ll still have access to the principal and, if tax rates double over time (as some experts predict), you will have shielded that portion of your net worth from a revenue-hungry IRS.

Read: Why new tax rules make Roth accounts better than ever

In conclusion, by avoiding theses tax mistakes, you’ll wring more efficiency from your retirement plans while insulating yourself from the inevitability of higher taxes.

https://www.marketwatch.com/story/avoid-making-these-3-huge-tax-mistakes-ahead-of-your-retirement-2018-09-07

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