Retirement can change the way you think about taxes. Instead of receiving a regular paycheck and having taxes withheld automatically, you may draw income from Social Security, pensions, investment accounts, and retirement savings. Creating a thoughtful tax strategy can help you keep more of your money and potentially extend your retirement income.
Understand Required Minimum Distributions
One of the most important tax considerations for retirees is the required minimum distribution, or RMD. Generally, you must begin taking RMDs from traditional IRAs and most qualified retirement plans at age 73. These withdrawals are generally included in taxable income.
Rather than waiting until the deadline, consider incorporating future RMDs into your retirement income strategy. Planning ahead may help you avoid taking larger-than-necessary distributions later and give you more control over your taxable income.
Consider Roth Conversions
Converting money from a traditional IRA to a Roth IRA can be another potential tax strategy. A Roth conversion generally makes previously untaxed amounts taxable in the year of the conversion. However, qualified Roth IRA distributions can generally be tax-free, and original Roth IRA owners do not have lifetime RMDs.
For some retirees, converting portions of retirement savings during years when taxable income is relatively low may make sense. However, a conversion can increase your tax bill, so it should be evaluated as part of your overall financial plan.
Be Strategic About Withdrawals
Where your retirement income comes from can affect your tax situation. You may have taxable traditional retirement accounts, tax-advantaged Roth accounts, and taxable investment accounts. Instead of automatically withdrawing from one account, consider how different withdrawal combinations could affect your overall tax liability.
The goal is not necessarily to minimize taxes in one particular year. A better strategy may be to manage taxes over the course of your retirement.
Don't Overlook Charitable Giving
Retirees who are charitably inclined may also have tax-efficient giving opportunities. Certain retirees can use qualified charitable distributions from eligible IRAs to make charitable gifts while potentially satisfying all or part of an RMD. The specific rules and eligibility requirements should be reviewed before making a distribution.
Make a Plan Before Making a Withdrawal
Tax planning in retirement is about more than preparing your tax return each year. Decisions about withdrawals, Roth conversions, charitable giving, and retirement income can have consequences that extend for years.
Your retirement strategy should be based on your individual income, assets, goals, and tax circumstances. Make an appointment with us to discuss your retirement strategy and explore opportunities to make your income work more efficiently.