Preparing for your ideal retirement begins during your working years with saving, some discipline, and taking advantage of the many planning efficiencies available to help you retire the way you want. When you officially make the jump to 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:
1. 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 percent to 37 percent, while long-term rates range from 0 percent to 20 percent in 2023. Qualified dividends are also taxed between 0 and 20 percent in 2023. Work closely with your advisor to develop an income and tax planning strategy that’s tax-efficient — don’t needlessly get stuck with higher rates.
2. Gifting strategies
There are many non-financial reasons to donate to causes 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 so long as it doesn’t exceed 30 percent of your adjusted gross income, and you’ll 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.
3. Retirement-friendly states
If you’ve ever considered moving, check out states that either have no state income tax or offer a deduction on your retirement income. Tax-friendly states besides Tennessee include Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota, and Wyoming.
4. Wise withdrawals
Once you’ve gone through the process of determining your specific income needs, you’ll need to decide which of your investment account(s) to pull funds from. Keep in mind that funds taken from a traditional IRA will be taxable income in the year they’re taken out, funds sold from a taxable account may have gains/losses that could affect your taxes, and funds taken from your Roth IRA have no tax consequences. One size does not fit all, but I normally recommend you take your retirement income as needed — first from cash sources, then from taxable investment accounts, then from traditional IRAs, and finally from Roth IRAs. Take advantage of the Roth rules by letting those funds work (with no RMD or tax liability) for as long as you’re able to.
5. Roth conversions
Now that you’re retired, you’re likely earning less income than when you were working, which will likely put you in a lower tax bracket. To take advantage of this shift, 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.
Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.
