Four Considerations for Effective Tax Planning in Retirement

As individuals transition into retirement, effective tax planning becomes crucial. It can help retirees maximize their income and preserve their savings. Here are five key strategies to consider for efficient tax planning in retirement:

1. Understand and Manage Retirement Income Sources

Retirement income can come from various sources, such as Social Security, pensions, retirement accounts (e.g. IRAs, 401(k)s), and investment income. Each of these sources is taxed differently. For instance, Social Security benefits may be partially taxable depending on your combined income. Planning involves understanding how each income source affects your tax bracket and taking steps to minimize taxes through strategic withdrawals.

The Internal Revenue Service (IRS) provides guidelines on how different income types are taxed. Financial advisors often emphasize the importance of planning withdrawals from retirement accounts to avoid pushing oneself into a higher tax bracket, thereby increasing the tax liability on Social Security benefits and other income.

2. Utilize Tax-Efficient Withdrawal Strategies

Strategic withdrawals can significantly reduce tax liability over the course of retirement. The general rule of thumb is to withdraw money from taxable accounts first, then tax-deferred accounts, and finally from tax-free accounts like Roth IRAs. This strategy allows tax-deferred accounts more time to grow, potentially reducing the overall tax burden.

Experts suggest using the years before required minimum distributions (RMDs) begin at age seventy-two to balance out tax brackets by converting traditional IRAs to Roth IRAs in years when income is lower. This move can save significant amounts in taxes over the long term by reducing the size of taxable RMDs and offering tax-free growth. This strategy may entirely change though for those retirees that continue to work part-time and still have earned income.

3. Maximize Deductions and Credits

Even in retirement, there are numerous tax deductions and credits available. Common deductions include medical and dental expenses, which can be considerable in retirement. Retirees who itemize their deductions may be able to deduct medical expenses that exceed 7.5 percent of their adjusted gross income.

Furthermore, charitable contributions remain a viable tax deduction. Retirees who are required to take RMDs can benefit from making charitable donations directly from their IRAs, a move that can satisfy RMD requirements without increasing taxable income.

While charitable giving is quintessential to many retirees' happiness, it can make a large impact by strategically planning how you’d like to give, maximizing the tax benefits. If nothing else, tax planning around charitable giving may help preserve more funds to be donated to causes of your choosing.

4. Adapt to Changing Environments

Effective planning takes effort and adjustment. Things like changes in the tax code, market conditions, interest rates, your personal health, and goals along with a variety of other variables may drastically change each year, thus changing which opportunities may help you the most.

It is highly recommended to revisit your tax plan regularly and adjust it to the current and expected future conditions. Examples may be taking distributions from brokerage accounts with effective tax-loss harvesting in volatile years and delaying distributions to tax free funds like Roth IRAs and Roth 401(k)s. 

In years in which you are participating in a favorable tax situation, you may choose to distribute more from your IRA or 401(k) and place it into a brokerage account looking for long-term capital gains treatment rather than continuing the tax deferral.

Effective tax planning in retirement is not merely about reducing taxes in the short term. It involves a comprehensive approach that considers income sources, withdrawal strategies, state tax implications, available deductions, and the impact on one's estate. By addressing these key areas, retirees can further work towards building their financial future and potentially help their retirement savings last longer and serve them better.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including possible loss of principal. No strategy assures success or protects against loss. To determine what is appropriate for you, consult your financial professional. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific tax or legal situation with your tax and/or legal professional.  DuCharme Wealth Management & SCF Investment Advisors, Inc. are separate entities. Advisory services offered through SCF Investment Advisors, Inc. 10150 Meanley Drive, First Floor San Diego, CA 92131 (800) 955-2517 Fax (559) 456- 6109. www.scfsecurities.com. Local office: 50 E 100 S, Suite 300, St George, Utah 84770. 435-288-3396.