Before I get into today’s discussion on how to reduce taxes in retirement, let’s talk about the combined excitement of the Super Bowl, the Olympics, and Valentine’s Day that has swept Lakewood Ranch homes and businesses the past week. A surge of football parties, hours cheering on our national athletes to Olympic glory, romantic dinners, a steady supply of nachos, wings, chocolates, and flowers. An odd combo to be sure.
Truth is, we haven’t had as much time as we’d like to revel in the light of the TV or candlelit dinners over here at Casement Group, LLC.
We’ve been busy with our own kind of excitement: The beginning of what is already proving to be another crazy tax season.
Which reminds us… Have you booked an appointment with us yet?
Our calendar’s filling up fast. So, if you haven’t already, you’re gonna want to grab a time with us and do it stat.
Now, last week, we discussed retirement contributions and lowering your tax bill. So, sticking with the topic of retirement, let’s talk about how to reduce taxes in retirement so you can hold onto as much of your nest egg as possible when you reach your golden years.
But before I dive into that, a word about Super Bowl commercials.
Every year, there is a collective moan among the tax and accounting community about the Intuit commercials, and how aggressively they crow about what is essentially an AI-driven software solution for a tax system that is FILLED with different opinions, code changes, and tax court interpretations that can favor YOU (the taxpayer) … or they can favor the tax TAKERS.
And Intuit seems to have figured out that what people really need is a person to guide them through it. Their big push this year is that you can have a person who is suited to your situation.
And yes … you can do that – or you can have an entire expert team that keeps in touch with you all year, who has a personal history with you, knows you and your family, is familiar with the tax code that affects the Lakewood Ranch region, and can suggest strategy and deductions with all of it in mind.
You decide ¯\_(ツ)_/¯
We’re right here for you, though, whatever decision you make: calendly.com/jim-704/15min
But let’s talk savings, shall we?
How to Reduce Taxes in Retirement: James P. Casement’s Pro Advice
“The question isn’t at what age I want to retire, it’s at what income.” – George Foreman
Something everyone dreams about is reaching those retirement years. Not only for the R&R but also because you finally get to tap into all that money you saved up over all those years.
What about the IRS? Well, they want their share of your retirement stash, too. And they’ll want it when you withdraw from your retirement accounts. Of course, paying your fair share of taxes is something you’d expect, but wouldn’t it be nice to give the IRS just a little less of your hard-earned savings?
Sure would – and here’s a little strategy for how to reduce taxes in retirement…
Is time on your side?
When you take money out of your 401(k) or individual retirement account (IRA), you make what’s called a “required minimum distribution” or “RMD.” The government says you can start taking distributions when you turn 59½; take out the money any earlier and you pay a 10% penalty (with some exceptions).
And though there’s a federal bill afoot to increase this age in the coming years, right now you still have to begin taking required distributions when you turn 72. The government’s reasoning is that you deferred taxes on this money via deductions when you put it into these accounts, and the government wants its money eventually.
(There are a few exceptions to this age-72 rule – check with us – and if you have a Roth IRA, it doesn’t have RMDs during your lifetime.)
The amount of your RMDs depends on both your account balance at the end of each year and your life expectancy according to an IRS Uniform Lifetime Table. New figures on the tables do let you reduce your RMDs a little.
If you don’t take any of your RMD starting when you turn 72, you’re in for a nasty surprise: a penalty that’s half of what you should have taken … yikes. The good folks at the IRS will waive the penalty for reasonable error if you promise to fix the situation. (That proposed federal law that we mentioned would lower this penalty to 25%.)
Common sense would seem to say that the longer you can leave your money alone until you turn 72 – even after you retire, especially if you can keep working – the better off you’ll be, right?
Not necessarily, at least when it comes to taxes. And helping you figure out how to reduce taxes in retirement is why we’re here today.
Time and growth can work against you
Given that your retirement account is invested in the stock market and the like, you see returns on your retirement account money every year. As long as you leave the money alone and let it grow, you see returns on your returns year after year, at least until you hit 72.
But think about it: By delaying RMDs completely, you’ll eventually be forced to make bigger withdrawals from an account that got fatter over time. That means a bigger tax bill in your early 70s.
We’re afraid there’s more: RMDs are taxed as income. That could mean a higher tax bracket, dings to your Social Security and tax deductions, and maybe even mucking up your Medicare.
How to reduce taxes in retirement
Let’s assume you want to retire and use your nest egg and not just leave the accounts to heirs (which can create a whole different set of tax problems for them). How do you whittle the tax bite on RMDs? A few suggestions:
Giving feels good. Sure does – especially when you save on taxes. You can donate some of your distributions to a qualified charity with what’s called a QCD, a “qualified charitable distribution.” This makes your RMD (up to a hundred grand from an IRA) non-taxable. Your IRA custodian has to agree to transfer the funds to your charity on your behalf (you can’t do that directly). You also can’t claim the donation as a charitable deduction on your taxes (no double-dipping…)
Go Roth. Qualified distributions from Roth IRAs are 100% tax-free and you don’t have any RMDs at all. By converting your traditional IRA to its Roth cousin, you can make tax-deferred assets into tax-free ones. Not completely “tax-free” though: You will owe ordinary income tax on assets that you convert, potentially a whopper of a tax bill for one year. We can help you do the long-term math to see if this deal’s for you.
Cue the QLAC. Qualified longevity annuity contracts (QLACs) can help you defer income taxes until you turn 85 when you have to begin receiving payments. (Again: “defer” doesn’t mean “eliminate” …) You transfer money out of your retirement account – lowering your RMDs – to buy the annuity. Could be a good tax-deferment if you live that long and you can pick the right annuity company.
One last word before I finish – and a little piece of good news Lakewood Ranch friends: The IRS has opted to suspend various automated notices until they clear up the jam in return processing from the last two years. This all comes after a push from tax pro coalitions and US senators alike demanding the IRS provide better support for taxpayers. ‘Bout time, IRS.
Though the IRS has been hard-pressed to support you, know that one of our priorities is to give you the best support we can offer you with your taxes, start to finish.
We’re here for you, your money, and your future,
James P. Casement