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.
![](https://cdn.mos.cms.futurecdn.net/2kgHZakX3Z58r5z6eGYh9R-415-80.jpg)
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.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
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/
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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."
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published