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  • Writer's pictureMark Fonville, CFP®

Retirement Tax Planning: 7 Must-Know Tips for Hefty Savings

Updated: Jan 7


Retirement Tax Planning: 7 Must-Know Tips for Hefty Savings

Are you ready to turn your retirement years into a tax-saving paradise?


If you're in the 50-and-above club, with retirement waving from the horizon, or already soaking up the sun in your post-career bliss, it's time to unlock the secrets of smart tax planning.


This article covers retirement tax planning tips on how to save more of your hard-earned dollars.


But, for serious investors who want personalized tax planning advice, we recommend that you talk to qualified financial advisor who specializes in tax planning in retirement.


Get ready to lower taxes and ensure your nest egg stays golden.



Here are the seven retirement tax planning tips for hefty savings that we'll cover:



1. Early Strategizing for Social Security


Early Strategizing of Social Security Claim

Understand the tax implications of your Social Security benefits. Depending on your income, your benefits may be subject to taxation. Strategic planning, such as delaying benefits, can lower your taxes.


By delaying the start of your Social Security benefits beyond your full retirement age (FRA), you earn more credits. This results in a higher monthly benefit when you start receiving payments. The increased benefit can provide a larger income cushion in your later years.


If you're considering retiring early, delaying Social Security can help reduce your taxable income during those initial years. This lower income might lead to reduced taxation on other income, helping you better manage your total taxes.


Here’s a Social Security cheat sheet that shows how you can maximize your benefits.


2. Mindful Required Minimum Distributions (RMDs)


Uniform Life Table For Calculated Lifetime Required Minimum Distribution (RMDs)

Once you reach age 72 (73 if you reach age 72 after Dec. 31, 2022), the IRS mandates that you start making withdrawals annually from your tax-deferred retirement accounts. Plan these withdrawals in advance to lower taxes and ensure your distribution strategy aligns with your financial needs.


By planning your RMDs, you can minimize taxes on your nest egg. Timing withdrawals from different accounts, such as taxable and tax-deferred, gives you more control over your tax bracket.


RMDs apply to tax-deferred retirement accounts like Traditional IRAs and 401(k)s. Being mindful of RMDs means you withdraw the minimum to avoid penalties and allow the remaining funds to continue growing tax-deferred. This delayed taxation is a benefit if you have other savings or income to cover your living expenses.



If leaving a legacy is part of your retirement goals, planning for RMDs can improve your legacy planning. By managing your withdrawals, you can preserve more of your retirement savings for heirs and other goals.


The starting age for RMDs will jump to 75 effective January 1, 2033.


3. Coordinate Withdrawals from Taxable and Tax-Deferred Accounts


Strategizing for Coordinating Retirement Account Withdrawals

Diversify your withdrawals to control your tax bracket. By managing your mix of taxable and tax-deferred accounts, you can minimize taxes on your income.


Withdrawals from tax-deferred accounts like Traditional IRAs and 401(k)s are typically taxed as ordinary income. By balancing withdrawals between taxable and tax-deferred accounts, you have more control over your taxable income. This approach helps manage your tax bracket, potentially minimizing your income that’s subject to higher tax rates.


Withdrawals from tax-deferred accounts contribute to your adjusted gross income (AGI). This affects the taxation of Social Security benefits. By balancing withdrawals, you can keep your AGI at a level that reduces taxes on your Social Security benefits.


Balanced withdrawals can be a benefit for estate planning. If you plan to leave assets to heirs, strategic withdrawals can lower taxes on your estate, allowing more of your wealth to pass to your beneficiaries.


4. Roth Conversions for a Tax-Free Future


Roth Conversions For A Tax-Free Future

Explore the benefits of converting traditional IRA and 401k funds into Roth accounts. Although this incurs immediate taxes, it can lead to tax-free withdrawals in retirement. This can offer flexibility and savings down the road.


Roth IRAs are not subject to RMDs during the original account owner's lifetime. By converting funds from traditional to Roth accounts, you can reduce the impact of RMDs on your taxable income in retirement.


If you anticipate that tax rates may increase in the future, Roth conversions allow you to pay taxes at current rates. This can result in long-term tax savings. This approach can be beneficial if you expect to be in a higher tax bracket in retirement.


Roth IRAs can be powerful tools for leaving a larger legacy to heirs. Since Roth IRAs are not subject to RMDs during the original owner's lifetime, the account can continue to grow tax-free.

 

Next Steps: Falling portfolio values can be stressful. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.


Here's how it works:


  • Answer these few easy questions, so we can understand your situation.

  • Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.

  • Check out the advisors' profile and have an introductory call on the phone or introduction in person, and choose who to work with in the future.



 


5. Tax-Efficient Investments


Tax-Effecient Investment Strategies

Opt for investments that minimize taxable gains, such as tax-efficient mutual funds or exchange-traded funds. For high earners, municipal bonds might be a good investment as well. This can ensure you keep more of your returns by reducing taxes on your investment gains.


Many investments held for more than one year qualify for long-term capital gains rates. These rates are lower than ordinary income tax rates. By favoring long-term investments, you can reduce taxes on your gains.


Qualified dividends are also taxed at lower rates than ordinary income. Invest in stocks that pay qualified dividends to benefit from lower tax rates. This can enhance your after-tax returns, contributing to a more tax-efficient investment portfolio.


Consider the taxes on different types of investments and accounts. For example, place tax-efficient investments in taxable accounts and tax-inefficient investments in tax-advantaged accounts. Strategic asset location can improve your tax efficiency.


6. Health Savings Accounts (HSAs)


Pros and Cons of Health Savings Accounts (HSAs)

If eligible, contribute to an HSA. Not only do these contributions lower your taxable income, but withdrawals for qualified medical expenses are also tax-free. It's a double win for your health and your wallet.


You can invest your HSA funds and the account grows tax-free. This tax-free growth can increase the value of your HSA over time, providing a valuable resource for medical expenses in retirement.


HSAs offer a triple tax advantage—contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-free. This makes HSAs a powerful tool for managing healthcare costs in retirement.

 

Next Steps: Falling portfolio values can be stressful. We recommend speaking with a financial advisor. This tool will connect you with a fiduciary financial advisor at Covenant Wealth Advisors with over 15 years of experience.


Here's how it works:

  • Answer these few easy questions, so we can understand your situation.

  • Schedule a call with a credentialed financial advisor who can help you on the path toward achieving your financial goals. It only takes a few minutes.

  • Check out the advisors' profile and have an introductory call on the phone or introduction in person, and choose who to work with in the future.



 

By contributing to an HSA throughout your working years, you can build a big pool of funds for healthcare expenses. This can alleviate financial stress from medical costs and lead to a more secure retirement.


7. Stay Informed and Adapt


Tax laws evolve, and so should your strategy. Stay informed about changes in tax regulations and be ready to adapt your retirement plan. Regularly review your financial situation and adjust as needed to optimize your tax savings.


As tax laws change, new strategies emerge. By staying informed, you can find and use the most effective strategies to minimize your taxes in retirement. This may include adjusting your investments, withdrawal strategy, or giving strategy.


Your situation may change over time due to factors like health, employment, or family events. Staying informed allows you to adapt your retirement tax plan to align with these changes. For example, if your income changes, you may need to adjust your tax strategies.



Consulting with financial professionals, such as tax advisors or financial planners, can keep you updated on changes and best practices in retirement tax planning. These professionals can provide advice based on your situation, ensuring that your plan aligns with your goals.


For example, at our firm, Covenant Wealth Advisors, we analyze client tax returns to identify potential opportunities. The sample illustration below provides a sneak peak of a tax summary report we create to help develop forward looking tax strategies.


Sample tax planning report from Covenant Wealth Advisors

Final Thoughts: Minimizing Your Tax Burden


As you embark on the journey toward your golden years, retirement tax planning is your secret weapon for a wealthier future. By weaving these seven tips into the fabric of your financial strategy, you're not just preparing for retirement; you're crafting a masterpiece of tax-savvy abundance.


Here's to a future where your nest egg not only survives but thrives. In the realm of retirement, smart tax planning is the true key to unlocking a treasure trove of financial well-being.


If you have over $1 million in savings and investments, check out our free retirement assessment to find the strategy that works best for you.


 

Mark Fonville, CFP
Mark Fonville, CFP

Author: Mark Fonville, CFP®


Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.


Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.


 

Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.


Registration of an investment advisor does not imply a certain level of skill or training.

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