Preparing for your ideal retirement begins during your working years with saving, some discipline and taking advantage of the many planning efficiencies that are available to help you retire the way you want to. When the day comes that you officially make the jump into retirement the planning doesn’t stop, it just changes. One way to help yourself while in retirement is to understand and take advantage of tax saving opportunities.
Here are some options you may want to consider:
- Qualified dividends versus capital gains. Depending on your income and whether you file a joint or individual return, federal short-term capital gains tax rates range from 10 to 40.8% while long term rates range from 0 to 20%. Qualified dividends are also taxed between 0 and 23.8%. Work closely with your advisor to develop an income and tax planning strategy that is tax efficient – don’t needlessly get stuck with higher rates.
- Gifting strategies. There are many non-financial reasons to donate to causes that you believe in, however being smart about how you donate is what I’m talking about here. Consider donating appreciated stock from your taxable account as opposed to liquidating a position and donating the proceeds. You can deduct the full amount of the appreciated stock, as long as it doesn’t exceed 30% of your adjusted gross income, and you will pay no tax on the gains.
If you need to take a required minimum distribution (RMD) from your IRA but don’t need the funds, consider directly transferring those funds from your IRA to a qualified charity instead and you won’t need to consider that RMD amount as income that year.
- Retirement friendly states. If you’ve ever considered moving, check out states that either have no state income tax or those that offer a deduction on your retirement income. The tax friendly states are Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota and Wyoming. Florida is my pick!
- Withdraw funds wisely. Once you have gone through the process of determining your specific income needs, you will need to decide from which of your investment account(s) to pull those funds. Keep in mind that funds taken out of a traditional IRA will be taxable income in the year they are taken out, funds sold from a taxable account may have gains/losses that could effect on your taxes, and funds taken out of your Roth IRA have no tax consequences when taken out. One-size does not fit all, but I normally recommend you take your retirement income as needed first from your cash sources, then taxable investment accounts, then traditional IRAs and finally Roth IRAs. Take advantage of the Roth rules by letting those funds work (with no RMD or tax liability) for as long as you are able to.
- Roth conversions. Now that you are retired, you are likely earning less income than when you were working, which will likely put you in a lower tax bracket. To take advantage of this, now may be the time to move funds from your traditional IRA into your Roth IRA. Yes, the funds taken out will be taxed but likely at much lower rates than while you were working. We recommend you work closely with your advisor and CPA to efficiently manage your tax brackets.
At BerganKDV we understand that taxes during your retirement years can be confusing. We’re here to make sure you understand your options and the best plan for you. Start here.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.