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Strategic Tax Planning Tips for Retirement Bliss

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We have asked for your feedback regarding topics our readers want to learn about, and so we are back this month with an article on tax planning in retirement. As everyone’s retirement assets, length, and goals are different, we will provide you with some general tax planning strategies to help mitigate tax and surcharges in retirement.

The first step to controlling taxes in retirement begins with starting to plan early. An earlier start gives you the ability to save more and in a greater variety of accounts, allowing you to pull from various sources to keep taxes lower in retirement. Similarly, working with a fee-only advisor can help to grow your overall portfolio, as well as to find opportunities to convert pre-tax assets to Roth accounts at lower tax rates. One major reason to plan is to avoid increased Medicare premiums from income-related monthly adjustment amounts (IRMAA).

Ways To Minimize IRMAA:

IRMAA is the monthly increase of your Medicare premiums based on modified adjusted gross income (MAGI) from two years prior. Once you go on Medicare, you are subject to the IRMAA income thresholds every year. Here are some ways to help minimize the effects of IRMAA:

    1. Contribute more to Roth accounts [IRA, 401(k), 403(b), etc.]. The SECURE Act 2.0 passed in 2022 made this more possible for everyone by allowing small business retirement plans such as SIMPLE IRA and SEP IRAs to offer Roth options. If you have one of these accounts, consider speaking with your advisor to determine whether switching your contributions to Roth would be beneficial. Strongly consider speaking with your employer to request a Roth option if it is not currently offered.
    2. Use qualified charitable distributions (QCD) to make charitable donations from an IRA once you are over 70 ½, if you are charitably inclined. Although the SECURE Acts pushed requirement minimum distribution (RMD) age up over the last several years neither have increased when individuals can start using QCDs to use pre-tax funds to contribute to charities. Distributions made directly to 501(c)(3) charities or churches from an IRA (including inherited IRAs) are not included in income, therefore avoiding inclusion in MAGI. Using after-tax funds, on the other hand, requires you to itemize deductions, which is a deduction after MAGI is calculated.
    3. Consider whether you have had a life-changing event in the last two years that would make your income drop below IRMAA limits in the current year. The life-changing events that qualify are work stoppage, work reduction, death of spouse, divorce, marriage, employer settlement payment, loss of income-producing property, and loss of pension income. If any of these life-changing events occurred, you can file form SSA-44 with the Social Security Administration to request your IRMAA surcharge be reduced in line with your current year’s income.
    4. You may be able to delay or avoid signing up for Medicare Parts B and D. If you are still working, you may be able to stay on your employer’s health insurance, allowing you to delay starting Medicare coverage. Additionally, a few employers, such as the federal government, offer retirement benefits that may not require you to sign up for Medicare Parts B and D. We strongly encourage you to review benefits with an expert on Medicare to ensure you cannot be penalized for not signing up for Medicare Parts B and D within the permitted window.

Limiting the Tax Consequences of RMDs:

No matter your age, you will be forced by the government to withdraw a certain amount from your pre-tax retirement accounts annually in the future. Working with a financial planner can help you to minimize the amount of tax you pay on these required distributions. Here are some of the strategies:

    1. Start QCDs at 70 ½ years of age. QCDs originally aligned with required beginning date (RBD) so that an individual with a RMD could offset some or all the RMD by giving it directly to charity pre-tax. If you are charitably inclined, start using QCDs at 70 ½ to donate pre-tax assets, lower your RMD requirement in the future, and save precious after-tax assets to replace cash from retirement account distributions.
    2. Consider Roth conversions. Strongly consider working with a fee-only advisor to help develop a tax plan involving Roth conversion. The plan may be to fill up the 12% bracket each year, delaying social security to allow you to convert more to Roth, or there may have been a life-changing event (loss of job, death) that lowers your income in a specific year that you can convert pre-tax assets to Roth at minimal tax costs. Keep in mind that converting means you are paying tax now rather than deferring taxes, and we recommend using after-tax cash to pay tax to maximize the converted assets.
    3. You can delay RMDs if you are still working past your RBD and your pre-tax retirement assets are in a 401(k), though exceptions apply. If assets are in an IRA, working does not exempt you from RMDs. Consider working with an advisor who can help determine whether this is a viable option for you and what needs to be done if you have assets in an IRA.

Consider Delaying Social Security as Long as Possible:

 A long-term retirement strategy to maximize your Social Security (SS) benefits may be to delay starting your SS as long as possible, up until age 70, especially for the higher earner of a married couple. Delaying allows the SS benefit to grow at an 8% guaranteed rate until 70. Additionally, this may allow for more years to convert pre-tax assets to Roth, because once you start taking SS there is a calculation to determine how much of the SS benefits are taxable (up to 85% of total benefits). This means every $1 converted may add roughly $1 of SS benefits to your Adjusted Gross Income until the 85% taxable threshold is reached. The result is you are paying twice as much tax on each dollar converted. If you are considering this option, it is best to work with a fee-only advisor that uses retirement software to review the benefits of waiting.

As everyone’s retirement will differ because of income sources, goals, and length, to name a few factors, it is difficult to go into specifics. However, working with a fee-only, fiduciary advisor using sophisticated retirement and tax software can help lay out important milestones and allow the advisor to find opportunities for tax savings and conversions.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

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