6 Tax Strategies for Retirement
Taxes are one thing retirees tend to have a little control over, as long as they do some serious planning.
Retirement requires many adjustments. Your allocation to stocks and bonds, your tolerance for risk, themanagement of your time — all might need adjustment in retirement. Tax planning is another area that needs attention.
Nationwide Retirement Institute’s recent survey found 70% of recent retirees are only “somewhatknowledgeable” or “not at all knowledgeable” about tax planning in retirement.
In your working years, often the only major tax strategy to consider is maximizing contributions to your retirement plan at work, thereby decreasing your taxable income. In retirement, there are more choices about where to pull income from and when, and those decisions can have important tax consequences.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are the top six tax strategies every retiree needs in retirement:
Be proactive: Tax strategy happens all year.
You need to get your financial adviser and tax professional on the same page about your income plan inretirement. That means giving them the information they need before the end of the year and as yourincome needs change throughout the year. Waiting until April 15 to start working on your tax strategy may be too late to tax optimize your retirement income plan.
Understand how Social Security is taxed.
Whether your Social Security is taxable depends on your “provisional income.” If your provisional income is less than $25,000 (for singles) or $32,000 (for married filing jointly), your Social Security is not taxable. Although that income level sounds small, it’s after deductions. Also, only half your Social Security income is counted in the calculation. Furthermore, certain income sources might not count toward the calculation. It can include income from Roth IRAs, municipal bond income and someannuity income. People with provisional incomes above those levels could be subject to taxes on up to 50% or even 85% of their benefits. Once you see where you fall on the Social Security tax spectrum, there are some steps you can consider to improve your position. Read 5 Ways to Avoid Taxes on Social Security Benefits.
Realize that cash is king, and your trust account is not far behind.
Keeping your taxable income low will help you save money on taxes. Having a withdrawal strategy thatincludes using your available cash can tax optimize your overall income picture. Also, consider your nonqualified accounts, joint account or trust accounts as income sources in retirement. Specifically, look at holdings with little appreciation that could be liquidated over time with little tax consequence.
Convert traditional IRAs to a Roth when it makes sense.
Traditional IRA and 401(k) contributions reduce your taxable income. This can lower your tax bill when your taxes are often at their highest. Withdrawals from IRAs and 401(k)s are, however, fully taxable. It’s important to think through how and when to take those withdrawals in the most tax-efficient manner.
A Roth IRA does not offer a tax deduction when you make an investment or do a conversion, but it does offer tax-free growth and tax-free income in retirement. Converting from an IRA to a Roth is a taxable event, but it positions that asset to grow tax free and be withdrawn tax free down the road.
When does it make sense to do a Roth conversion? Talk to your tax adviser every December and ask how much a conversion might cost. Converting slowly over time often makes the most sense. Converting too much at one time can put you in a higher tax bracket and be costly. A slow, long-term Roth conversion strategy can mean more long-term wealth and a more tax-efficient plan.
Manage your investments based on their tax classification.
If your investments in your Roth and your traditional IRA and your trust account are all in the same kinds of funds, you or your adviser could be doing something wrong.
- Your Roth should be the most aggressive asset in your portfolio because it grows tax free, you can pull money out tax-free in retirement and you can give it to whomever you want tax free.
- Your traditional IRA can be more actively managed because you can buy or sell positions with no tax consequence until you make a withdrawal.
- Your joint or trust account is better for more buy and hold positions — long term investments — because they get a step up in cost basis when you or your spouse passes away. A step up in cost basis means the remaining spouse can sell the individual position like a stock or an ETF and pay no taxes.
Be charitably tax smart.
If you give consistently to your church or charity, make sure you note the tax benefits of those gifts. If you are still working and are in a higher tax bracket, consider pre‐funding some of your charitable gifts to get the most out of those tax deductions in years you might need the deduction.
Consider a family foundation or your own donor advised fund to pre‐fund charitable gifts in the years you need the deductions. In retirement, when you may be in in a lower tax bracket, you might not have the same level of tax savings by making tax-deductible gifts.
Disclaimer
Investment Adviser Representative of USA Financial Securities. Member FINRA/SIPC A Registered Investment Advisor. CA license # 0G89727 https://brokercheck.finra.org/
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Scot Landborg has over 17 years of experience advising clients on retirement planning strategies. Scot is CEO and Senior Wealth Adviser for Sterling Wealth Partners. He is host of the retirement planning podcast Retire Eyes Wide Open. Scot is a regular contributor to Kiplinger.com and has been quoted in "U.S. News & World Report," Market Watch, Yahoo Finance, Nasdaq and Investopedia. He also formally hosted the nationally syndicated radio show "Smart Money Talk Radio."
-
How to Help Your Kids Without Ruining Your Retirement
Here are some general considerations to ensure the gift of assets to your kids will not negatively affect your financial future.
By Mario Hernandez Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
How Annuities Can Help You Retire Early and Delay Social Security
Waiting until 70 to claim Social Security benefits can pay off, so how do you bridge the gap between giving up your paycheck and filing for benefits?
By Ken Nuss Published
-
How to Get Your Kids to Step Off the Gravy Train
A surprising number of young adults live with their parents. Setting some financial ground rules could get the kids out on their own faster.
By Neale Godfrey, Financial Literacy Expert Published
-
Spring Is a Good Time to Clean Up Your Finances, Too
While you’re decluttering your home for spring, consider also taking a crack at cleaning up your finances and old paperwork.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Is Your Retirement Solution Hiding in Plain Sight?
Here’s how to use your home equity in combination with an annuity contract to produce late-in-life income.
By Jerry Golden, Investment Adviser Representative Published
-
How to Choose Your Trustee or Executor of Your Will
Above all, you should choose someone you trust, keeping in mind that acting as a trustee or executor can be a complex, thankless and sometimes long-term job.
By John M. Goralka Published
-
Three Steps for Women to Take Control of Their Finances
These strategies are especially for women who are new to managing their money because of divorce or the death of a spouse.
By Emily Glassman Published
-
How AI Can Help Take the Emotion Out of Investor Decisions
AI-driven recommendations can complement human judgment, leading to more rational choices that aren’t as influenced by biases and blind spots.
By Francis Geeseok Oh Published
-
Can You 1031 Exchange into a REIT?
No, you can't, but two other REIT-like alternatives let you defer capital gains taxes while giving you exposure to institutional-quality real estate assets.
By Daniel Goodwin Published