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How to Minimize Taxes in Retirement

August 10, 2020
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Part of our job at IIS Financial Services is to advise clients on the best path to retirement. We also believe offering strategies to help reduce taxes during retirement is equally as valuable, as taxes can take a bite out of your retirement income if not done properly. Here are four important strategies to think about if you are in or approaching retirement.

1. Roth Conversions

If you have sizable balances in traditional IRAs or an employer plan such as a 401(k), the required minimum distributions (RMDs) can represent a significant tax hit each year. Converting money from a traditional IRA or employer plan to a Roth IRAs is a way to reduce your future income taxes.

Lower RMDs mean less taxable income, which can result in lower taxes on Social Security benefits, lower Medicare premiums, and potentially greater deductions for items tied to your Adjusted Gross Income. Reducing or eliminating RMDs through Roth conversions can have a dramatic impact on your future tax costs.

Roth conversions may be especially attractive in 2020 due to the lower tax rates in effect as a result of tax reform legislation enacted in 2017. Taxes due on a Roth conversion will need to be considered versus the potential tax savings down the road.

2. Qualified Charitable Deductions (QCDs)

If you are at least 70½ and have charitable inclinations, QCDs can be taken from a traditional IRA and up to $100,000 can be contributed to a qualified charitable organization. The benefit is that the amount of the QCD is not subject to federal income taxes. Though no charitable deduction is available to those who can itemize, these distributions are not taxable. QCDs were originally tied to RMDs as a way for those account holders to get a tax break for contributing to charity in the event they were not able to itemize deductions.

While the SECURE Act raised the age to start RMDs to 72 as of January 1, 2020, the age for taking a QCD was left at 70½. Even if you are not yet offsetting an RMD, the QCD is still a tax-free way to use IRA funds for a charitable contribution and will reduce the amount subject to RMDs in future years.

3. IRA Contributions Beyond 70½

The SECURE Act removed the maximum age, formerly 70½, for contributing to a traditional IRA account. If you have earned income from employment or self-employment, you can make pre-tax contributions to a traditional IRA account. This serves to reduce taxable income for the year and adds additional tax-deferred savings to your account. Any income restrictions for those who are working and covered by a workplace retirement account will still apply.

4. Deferring RMDs While Working

If your working past the age to commence their RMDs, you can defer taking their RMDs from your current employer’s 401(k), 403(b), or 457 plan, as long as you do not own 5 percent or more of the company. The employer must opt to offer this deferral.

If their plan allows it, you can potentially do a reverse rollover of an IRA or old 401(k) plan into this plan as well, given those funds were originally contributed on a pre-tax basis. These funds will not be subject to an RMD either. Before doing a rollover, you should assess the quality of the investments offered by the current plan. RMDs connected with other retirement accounts must still be taken; this deferral does not apply to those accounts. 

Need help with creating a tax-efficient retirement plan or have questions?

Please contact us at 207-761-4733, email retire@iisfinancial.com, or schedule a call today.

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