3 Tax-Efficient Strategies to Help Maximize Your Retirement Income

When people start planning for retirement, they often focus on one major goal: accumulating enough money to retire comfortably when ready.

Unfortunately, that’s often where the planning stops, meaning some pretty important stuff might be left out, including:

• Figuring out how to convert those accumulated assets into a reliable income stream that will provide the desired lifestyle.
• Looking at tax strategies that will help you hold on to and pass down more of what you worked so hard to save.

Creating a plan that distributes your investments in the most tax-efficient manner possible can help you reach your goals for retirement and beyond — but it’s no easy task. And if you procrastinate, you could miss out on some of the significant tax savings provided by the Tax Cuts and Jobs Act of 2017, as many of its provisions are set to expire at the end of 2025.

Here are three tax strategies that could strengthen your retirement plan going forward.

Converting Traditional IRA Dollars to Roth IRA Dollars

Worried about future tax rates — especially when required minimum distributions (RMDs) kick in at age 72? Converting your traditional IRA to a Roth IRA could help you reduce the tax burden down the road for both you and your heirs. Here’s an example:

Our office is currently working with a client who would like to take about $60,000 each year from an IRA when she reaches 72. Along with her other income streams, that’s all she expects to need. But based on what she has in her account now, and with an estimated 6% growth rate, the amount the government requires her to withdraw could be closer to $90,000 — or more.

Fortunately, her assets are structured in a way that she could draw income from non-qualified accounts for the next few years while she converts money from her traditional IRA to a Roth. She’ll be required to pay taxes on the money as she moves it, and she’ll have to be careful not to bump herself into a higher tax bracket in the process. But thanks to the Tax Cuts and Jobs Act, she can convert the money at a 3% lower tax rate until the end of 2025. Once the money lands safely in that Roth account, her savings can grow tax-free for her and her heirs.

Using Charitable Giving to Reduce Taxable Income 

Concerned the sale of a highly appreciated asset could send your taxes skyrocketing? A specific type of charitable remainder trust, called a charitable remainder unitrust, or CRUT, might help blunt the impact.

A CRUT is an estate-planning tool that provides income to a named beneficiary (usually the person who creates the trust or a family member). Then, after the beneficiary dies, the remainder of the trust goes to a charitable cause.

We’ve been looking at the tax-saving potential of a CRUT for a client who’s still working, has multiple rental properties and is in the 35% marginal tax bracket.

If our client were to take some of the real estate he owns and donate it to a CRUT instead of selling it as he planned, the tax benefit would be twofold: He’d receive an immediate charitable tax deduction and eliminate the capital gains from selling the property.

The trust also would produce income during our client’s lifetime, and when he passes, the remaining trust balance would be donated to the charity of his choice. He would be selling the property, eliminating some of the taxes, maintaining an income stream and creating a legacy — all with one strategy.

Making the Most of Company Stock with an NUA Distribution

Do you own highly appreciated company stock in an employer-sponsored retirement plan? If you’re worried about the potential tax burden in retirement, you may want to consider the benefits of setting up a net unrealized appreciation (NUA) distribution. 

Under the NUA rules, employees who have company stock in a 401(k) can roll over those shares to a brokerage account and pay tax only on the cost basis of the stock at the time of distribution. Then, later, when those shares are sold, rather than paying ordinary income tax rates, the account holder will pay the taxes at more favorable long-term capital gains rates.

We currently have a client who could benefit from doing an NUA distribution, tied in with a CRUT, and possibly convert some of his remaining 401(k) balance to a Roth. In other words, when you’re looking at these tax-saving strategies, it isn’t necessarily an either-or decision.

However, it can be complicated, which is why it’s wise to work with experienced financial professionals who can help you understand future income needs, the source of that money and potential taxes in retirement. Your financial adviser also can work alongside your tax professional to help ensure you’re following all the IRS rules for whatever strategy you choose. Additionally, you’ll want to involve an estate attorney if you’re creating a trust.

Don’t let concerns about complexity cause you to delay. Today’s lower tax rates can be an important tool for mitigating future tax obligations while maximizing future income. Time is running out to take advantage of these historic savings.  

Kim Franke-Folstad contributed to this article.