Don't let the name fool you. The recently passed American Taxpayer Relief Act may have averted the first of a likely series of "fiscal cliffs," but there was little relief for prospective retirees.

Payroll taxes have gone up. Dividend taxes have risen. Itemized deductions for the highest earners are now limited. (For further detail, see "Taxes: A Guide to 2013's Big Changes.") And all that is in addition to the Patient Protection and Affordable Care Act upheld by the Supreme Court last year, which imposes a 3.8% surtax on net investment income for couples with a modified adjusted gross income (MAGI)¹ of $250,000 or higher ($200,000 for singles) and an extra 0.9% Medicare tax on earned income.

At the same time, millions of Americans, particularly baby boomers who are 50–65, are staring at a fiscal cliff of their own. Or, perhaps, call it a "retirement ravine": Thanks to modern medicine, baby boomers are living longer, but many haven't saved nearly enough to retire or, for that matter, pay for health care before Medicare kicks in at age 65 (assuming they're still eligible). And there is no telling how much Medicare will pay for when millions of other boomers become eligible over the next decade.

As a recent paper by the AARP Public Policy Institute put it, "Those that do save often contribute too little, invest poorly, or withdraw funds early. These patterns leave households... vulnerable to insufficient savings to finance adequate living standards during old age and retirement. Looking ahead, the retirement of the baby boomers, the aging of the population, and rising healthcare costs will place increasing pressure on Social Security and Medicare, making achieving a secure retirement even more challenging for many. As Congress considers budget reform, proposals to strengthen the private retirement system should be given serious consideration."

What can an individual do in the meantime (besides saving more, spending less, and consulting one's financial advisor)? Consider the following.

A Muni-Splendored Thing
One investment option that has drawn greater attention is to allocate more funds into tax-free municipal bonds, since interest from those bonds remains exempt from federal taxes in most cases. [It should be noted that the income from municipal bonds may be subject to the alternative minimum tax, however.]

Now that the top marginal tax bracket has risen from 35% to 39.6% in 2013, the taxable equivalent yield of a hypothetical municipal bond with a yield of 4.00%² would be more than 6.6% at the highest tax bracket (5.5% in the 28% bracket)—a rather enticing prospect in a slow-growth environment fraught with uncertainty.

The Greats of Roth
Another option advisors may want to broach to their clients is converting a traditional IRA to a Roth IRA, which would potentially enable tax-free withdrawals, but now there are more factors to consider. For one thing, conversion could be subject to a 20% capital gain rate (versus the previous 15%). For another, the proceeds could put you in the top tax bracket of 39.6% (versus the previous 35%), while dividend taxes are also going up and itemized deductions and personal exemptions for certain taxpayers are being phased out. Then there's the 3.8% investment income surtax that recently took effect. (See Table 1 for examples of what will and will not be considered investment income.)

Maximize Your Pretax Contributions
Last, but not least, don't forget to contribute as much as you can to a retirement plan on a pretax basis, whether it's to a 401(k), a 403(b), or a 457 plan. Not only will that help lower your MAGI but also it potentially might reduce or eliminate your exposure to the 3.8% surtax on net investment income.