Tax-Savvy Strategies for a More Secure Retirement

Retirement should be about enjoying life, not stressing over taxes. However, many retirees find themselves paying more in taxes than expected, reducing their disposable income for travel, hobbies, and other pursuits. This guide offers strategies to help understand taxes in retirement and as possible, minimize tax burdens, ensuring you keep more of your hard-earned money to live the retirement you want.

Understanding Retirement Taxes

Many retirees will pay less in taxes since their income will be lower, but it they do not withhold enough from their sources of income, they may wind up owing money (and perhaps assuming they are paying “too much” in taxes). However, income from retirement accounts, Social Security, and investments can still be taxable.

Retirees need to know that their primary sources of income are taxable: pensions are taxed as ordinary income as are distributions from IRAs and employer-sponsored retirement plans like a 401k, Deferred Comp, 403b. Also, 50% of Social Security benefits when income is above $35,000 for a single filer and $44,000 for those who are married filing jointly, until the maximum 85% of the Social Security benefit is taxed. An effective tax payment strategy is to withhold taxes from Social Security equal to the tax liability on that income net of the standard deduction, then withhold from all the other taxable sources of taxable income at the level of the tax bracket that the distribution will put you in.

Key Tax Strategies

1. Managing Your Income Sources
   • After retirement, wages cease and income comes from Social Security, pensions, IRA withdrawal, interest income, and dividends and capital gains on-IRA investments. Properly timing withdrawals from IRAs and when taxes are incurred on investments can help control your tax liability.
2. Optimizing Interest Income
   • If taxable interest income (Form 1040, line 2b) isn’t needed for living expenses, consider shifting investments to tax-deferred investment vehicles to reduce immediate taxation.
3. Match tax treatment of investments with tax treatment of accounts
   • Capital gains are taxed at a lower rate than ordinary income but will only receive this more favorable tax treatment when investments that qualify for capital gains are placed in after-tax (non-IRA) accounts.
   • Having the same investment allocation in IRA and non-IRA accounts might not be tax efficient. Create an overall risk allocation for your entire portfolio and place investments that generate qualified dividends and capital gains in non-qualified when possible to fit your overall investment allocation. Place vehicles that are taxed as ordinary income into pre-tax accounts.
4. Roth Conversions for Tax-Free Withdrawals
   • Converting traditional IRAs to Roth IRAs  if you are in a lower tax bracket now than you will be in the future allows for tax-free withdrawals in the future, which could also reduce taxation of Social Security benefits. You (or your beneficiaries) will pay taxes on IRA accounts as the assets are withdrawn. Taxpayers should take advantage of the discretion they may have as to when to take distributions or do Roth conversions.
5. Capital Gains Planning
   • The capital gains tax rate is 15% for most individuals, but some retirees may qualify for a 0% rate by strategically timing their gains in low-income years.
6. Avoiding the Social Security Tax Torpedo [or Avoiding taxes of Social Security]
   • Up to 85% of Social Security benefits can be taxed if provisional income crosses certain thresholds. Strategic Roth conversions and controlling taxable income can help mitigate this issue.

7. Tax Deductions
   • Short of having high mortgage interest, being a very generous donor, or incurring high out-of-pocket medical expenses, taxpayers generally do not qualify for itemizing deductions. However, by bunching up deductions that would ordinary be incurred over two tax years into a single tax year might provide enough deductions to itemize.
8. Tax Loss Harvesting

• Offset capital gains on investments, by incurring tax losses—selling investments that have an investment cost-basis (loosely defined as the cost of having acquired it) that is higher than the market value…unless the investment is expected to outperform other investments.

9. Charitable Giving for Tax Efficiency
   • Utilizing donor-advised funds or donating appreciated assets can lower capital gains tax while providing a charitable deduction.
   • Taxpayers who are over 70½ can take advantage of Qualified Charitable Contributions, making contribution directly from their IRA accounts without them being considered taxable event and having them count toward Required Minimum Distributions they may need to take. (These contributions are both tax-deductible.)

As you look at your retirement plan, it’s crucial to consider taxes so you can implement proactive strategies. Consult a financial advisor to optimize your tax plan, ensuring that more of your savings go toward funding your dream retirement, not the IRS.

Len, the Delaware Retiree Advisor, is a Certified Financial Planner™ with over 30 years’ experience navigating the complexities of Financial Planning and Retirement Planning. As the founder of The Delaware Retiree Connection, and the director and owner of Dedicated Financial Services, Len offers his wealth of experience to guide others through the mire of Financial and Retirement Planning.  As a Certified Life Coach, he pairs his financial expertise with a heart to help others who want to make the most of their retirement plan.

Investment Advisory Services are offered through Turner Financial Group, Inc., an SEC Registered Investment Advisory Firm. Insurance products and services are offered through individually licensed and appointed agents in appropriate jurisdictions. Leonard Hayduchok NJ License #9243813, Dedicated Financial Services LLC, NJ License #1663601, Leonard Hayduchok, DE License # 1331748; Dedicated Financial Services LLC, DE License # 3000323897.