Everyday Affluence: Trouble-Free Tax Planning for Today’s Retirees

You know what they say: there are only two sure things in life, and neither of them are pleasant. While we haven’t quite found a way to outsmart the Grim Reaper yet, Uncle Sam is a bit of a different story. There’s no (legal) way to avoid paying taxes altogether, of course. But getting strategic with your tax planning can lower your overall burden, especially as retirement draws near. And as much as we all love libraries and highways, most of us also want to keep as much of our earnings in our pockets as possible.

5 Tax-Planning Tips You May Not Have Considered

You’ve worked hard for your money — which is, after all, why you owe taxes in the first place! But there’s no reason to fork over more than you need to come tax time, especially given some of the most recent changes to the code. Here are some tax-planning tips that’ll keep the IRS satisfied while also boosting your coffers.

1. Tax Me Now… or Tax Me More Later

You’ve probably heard about the acrobatics the tax code has gone through since the beginning of the current administration. Corporate rates have been slashed, the standard deduction has been doubled — and most importantly for you, income brackets have temporarily been lowered.

That means it may make sense for you to begin drawing from your qualified retirement accounts such as a 401(k), 403(b), or IRA, before you reach age 70.5 or the start of your Social Security benefits. Although you’re not yet required to make minimum distributions, you may want to take advantage of those lower rates, which expire in 2025. (If you wait, you may end up owing taxes on a higher bracket!)

Just be sure you’ve already celebrated your 59.5th birthday before you start making withdrawals. Otherwise, you’ll be subject to an early withdrawal penalty of 10% on top of the income tax requirements — which could easily eclipse any savings you’d see by taking advantage of the lower bracket.

2. Avoid RMDs by Making a Roth Conversion

On the other end of the spectrum, if you have ample savings to live on — outside of a retirement account — you might want to convert portions of any traditional retirement accounts you do have to Roths. Yes, you’ll have to pay taxes on the conversion, but you won’t have to figure in those assets when you’re making RMD calculations in the future. Plus, you’ll still get to take advantage of those temporarily-lowered tax brackets. And who doesn’t want a tax-free source of income to draw on in the future?

3. Still Contributing to a 401(k)? Consider This Switch

Psst: IRAs aren’t the only Roth accounts available. There’s such a thing as Roth 401(k) deferrals… and given these lower tax brackets, it might make sense to switch if you’re still making contributions to your company-sponsored retirement plan.

Although it may not be advertised in the front and center of your HR paperwork, most 401(k) policies do allow Roth contributions, so check with your employer to see if you can make the switch. You can also continue making contributions to your Roth IRA at the same time, by the way — which will set you up for a nice, cushy, tax-free income stream once it comes time to throw in the towel. (You could also allow the assets in the Roth IRA to grow indefinitely, which is a great way to pass along a tax-free inheritance to your beneficiaries.)

4. Get Give-y With It… But Plan Carefully

Charitable contributions have traditionally been a great way to lower your tax burden. Who can argue with donating money to a great cause?

But it’s important to note that, under the new tax laws, it’ll require more thoughtful planning to receive a deduction. Since the standard deduction is so much higher, many taxpayers will take it rather than itemize — so your contribution may be washed out, tax-wise.

Of course, that doesn’t mean it’s not a good idea to support the organizations you’re passionate about. Just make sure your tax planning reflects the updated code. (And don’t forget you can also make qualified charitable distributions directly from eligible retirement accounts if you’re over the age of 70.50!)

5. Ongoing Tax Planning: Take Advantage of Those Special Rates!

Here’s the thing: successful tax-planning isn’t a one-time deal. Taking distributions, making Roth conversions, and realizing gains (or losses) gives you the ability to influence your income on a year-by-year basis, especially given these lower brackets. Even if it’s not time to start taking RMDs yet, we highly recommend you take advantage of the lower rates — because who knows what will happen after 2025?

For a more detailed and personalized look at how smart tax planning could affect your financial landscape, reach out to us directly to set up a conversation, whether in-person or over video chat. It’s not every day that the tax code works in retirees’ favor… so make sure you don’t miss out on this unique opportunity!

investing for retirement ebook ipad - McClain Lovejoy
investing for retirement ebook ipad - McClain Lovejoy
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