VIDEO: 5 Strategies for Saving Taxes in Retirement

VIDEO: 5 Strategies for Saving Taxes in Retirement

By Joe Dowdall, CFP®, RICP®, CRPC®, CCFC 

Worth Asset Management is driven by the goal of providing best-in-class financial planning with clarity as you plan for and transition into retirement. As a founding member of Worth Asset, my goal was to focus more on my clients, providing the best possible experience and offering strategies to solve their problems and benefit their lives. Check out this quick video where I discuss 5 strategies for saving taxes in retirement.

Transcript

Five Key Tax Planning Strategies for Retirement

Hi, my name is Joe Dowdall, and I am a financial planner at Worth Asset Management. At Worth Asset Management, we focus on providing clients with comprehensive retirement planning, with a special emphasis on tax planning. Tax planning in retirement can be significantly more complex than during your working years, and it plays a crucial role in your overall retirement strategy. Today, I’m going to cover five important areas to focus on when it comes to tax planning in retirement.

The Social Security Tax Torpedo

One of the most surprising aspects of retirement tax planning is the potential taxation of your Social Security benefits. Up to 85% of your Social Security benefit could be taxable if your provisional income is too high. Provisional income includes not only your Social Security benefits but also other sources of retirement income. The key here is monitoring your provisional income throughout the year. It’s important to ensure that you’re not inadvertently triggering additional taxes on your Social Security benefits, which can significantly impact your retirement income.

The Medicare Surcharge Cliff

While this isn’t technically classified as a tax, I consider it a cost that can affect you in retirement. This surcharge is tied to your modified adjusted gross income (MAGI) and impacts how much you pay for Medicare. If your MAGI exceeds a certain threshold, even by a small amount, you could face a higher Medicare premium. The increase can range from just a few extra dollars a month to several hundred dollars for the entire year. Keeping an eye on your MAGI can help you avoid these higher costs, which can take a toll on your retirement budget.

Taking Advantage of Low-Income Tax Years

If you find yourself in a year where your income is unusually low, this could present an opportunity for tax planning. Low-income years are ideal for converting funds from traditional, pre-tax accounts (like a traditional IRA) into tax-free accounts, such as a Roth IRA. By converting funds during these years, you can pay taxes on the converted amount now, rather than later in retirement when you might be in a higher tax bracket. This strategy can help you manage your tax liabilities over the long term.

Lowering Long-Term Capital Gains Taxes

Another potential benefit of a low-income tax year is the possibility of reducing your long-term capital gains taxes to zero. If you own appreciated assets like stocks or mutual funds in after-tax accounts and sell them, you may qualify for a 0% long-term capital gains tax rate, depending on your income. If your overall taxable income is low enough, this strategy can help you avoid paying taxes on the gains from the sale of these assets, which can be a significant advantage in retirement.

Qualified Charitable Distributions (QCDs)

For those who are charitably inclined in retirement, a Qualified Charitable Distribution (QCD) can be a highly tax-efficient way to donate to charity. If you are 70½ or older, you can direct funds from your IRA directly to a charity, which counts as a tax deduction on your tax return. This allows you to make charitable contributions without increasing your taxable income. Since QCDs don’t count as taxable income, they can also help reduce your adjusted gross income (AGI) and potentially lower your Medicare premiums and other taxes.

Final Thoughts on Tax Planning in Retirement

These five strategies—Social Security tax torpedo, Medicare surcharge cliff, low-income tax years, long-term capital gains taxes, and Qualified Charitable Distributions—are essential considerations for anyone planning for retirement. Understanding and leveraging these strategies can help you navigate some of the complexities of taxes in retirement and potentially reduce your overall tax burden.

If you would like to discuss these strategies in more detail or need assistance with your tax planning, feel free to reach out. You can schedule a time to talk, or, as I mentioned earlier, your financial planner can help you keep track of these important factors throughout your retirement.

Thanks for your time, and take care!