Semi-retirement can be a sweet spot: you’re easing out of full-time work, taking on consulting or part-time projects, and enjoying more freedom. But with this flexibility comes new tax challenges.
When you reach this point, your income may be irregular, deductions may change, and you’ll likely need to plan more carefully to avoid surprises at tax time. The good news? With the right strategies, you can keep more of what you earn.
Taking Advantage of Retirement Contributions
Even if you’ve left full-time employment, you can still contribute to retirement accounts. Options like SEP IRAs, SIMPLE IRAs, or solo 401(k) plans allow consultants and freelancers to shelter income from taxes while continuing to build their retirement savings. These accounts often come with higher contribution limits than traditional IRAs, giving you more room to save.
Maximizing these contributions not only reduces taxable income now but also strengthens your long-term financial security.
For more ways to stay retirement-ready, see The Best Investments for People in Their 50s and 60s.
Tracking Deductions and Expenses
One of the perks of consulting or part-time self-employment is the ability to deduct business-related expenses. From home office costs to professional development, travel, or equipment, these deductions can meaningfully lower your taxable income.
The key is organization. Keep detailed records and save receipts throughout the year. Using accounting software or working with a tax professional ensures you capture every eligible deduction and stay compliant with IRS rules.
Managing Estimated Taxes
Unlike traditional employment, where taxes are withheld, consultants and semi-retirees often need to make quarterly estimated tax payments. Missing these deadlines can lead to penalties and interest.
Creating a schedule to set aside a portion of each payment you receive makes quarterly taxes less painful. Many retirees find that opening a separate account for tax savings helps ensure funds are available when needed.
Coordinating Taxes with Social Security
If you’ve started claiming Social Security, consulting income can push part of those benefits into the taxable range. Up to 85% of your benefits may be taxed depending on your combined income.
Strategically timing withdrawals from retirement accounts, or delaying Social Security, can help manage this burden. Planning ensures you don’t pay more in taxes than necessary.
For additional insights, see Social Security Claiming Strategies That Could Save You Thousands.
Planning for Healthcare Costs
Semi-retirement often means a patchwork of healthcare coverage—sometimes through a spouse, the Affordable Care Act marketplace, or Medicare if you’re eligible. Premiums, deductibles, and out-of-pocket expenses can all impact taxable income.
Contributions to Health Savings Accounts (HSAs), if available, provide a triple tax advantage: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. Factoring healthcare into your tax plan is crucial for protecting both your health and your financial well-being.
Exploring Entity Structures
Depending on your income level, it may be advisable to establish a formal business entity, such as an LLC or S corporation. These structures can offer tax advantages, liability protection, and greater flexibility in how income is received—whether as salary, distributions, or a combination of both.
Entity choice should be tailored to your situation, so it’s best to consult with a tax advisor or attorney before making changes. Done right, this move can provide significant savings over time.
To prepare for bigger life and financial shifts, see How to Plan for Unexpected Life Transitions After 50.
