Smart tax planning doesn’t end when you retire. In fact, it becomes more crucial when income is fixed and opportunities to boost finances are limited. Missing key tax strategies can lead to lasting financial regrets. Here are four moves financial planners say retirees often overlook:
Roth Conversions: Beat the RMDs
Converting traditional IRAs and 401(k)s to Roth IRAs is a powerful strategy, especially before required minimum distributions (RMDs) begin at age 73. The key? Timing.
Financial advisor Josh Kaplan explains that many retirees already have Social Security income by the time RMDs kick in, pushing them into higher tax brackets. Converting funds strategically before age 73 can minimize the tax hit. The converted amount is taxable upfront, but often at a lower rate than what retirees will face later. Plus, Roth conversions can help lower Medicare premium surcharges by keeping future income lower.
Qualified Charitable Donations: Maximize Giving
Many retirees miss out on significant tax benefits by not utilizing qualified charitable distributions (QCDs). After age 70½, you can donate directly from a pre-tax IRA to a qualified charity without increasing taxable income. This is far better than taking a distribution and then donating, as the latter adds to your taxable earnings.
Financial planner Chad Gammon notes that many seniors take out distributions only to donate the money later, leaving tax savings on the table. QCDs are a direct, efficient way to support charities while reducing your tax burden.
Tax-Efficient Investments: ETFs vs. Mutual Funds
Retirees often underestimate the impact of investment structure on taxes. Exchange-traded funds (ETFs) are generally more tax-efficient than traditional mutual funds. ETFs tend to generate fewer capital gains distributions, giving you greater control over taxable income.
While a full portfolio shift may not be necessary, selectively incorporating ETFs – especially alongside charitable giving – can lead to long-term tax advantages.
Strategic Withdrawals: A Coordinated Approach
A well-planned withdrawal strategy is vital. Blending taxable, tax-deferred, and tax-free assets allows retirees to control annual taxable income. This isn’t just about minimizing taxes; it also protects against higher Medicare premiums (IRMAA) and ensures eligibility for deductions like the enhanced senior deduction.
“A coordinated strategy is the difference between enjoying a comfortable retirement and facing unexpected tax bills,” says Gammon.
Bottom line: Proactive tax planning in retirement is not optional. These moves can significantly reduce your tax liability, preserve your income, and ensure a more secure financial future. Ignoring them can be a costly mistake.
