As the year winds down and tax season begins to loom large, it’s time to begin strategizing for a last-ditch effort to save on your upcoming tax bill.
Roth Conversions
After retirement, your income level typically decreases for a time before you begin taking out social security and required minimum distributions.
During this time, while your tax rate is at its lowest point, we believe, depending on your situation, it may be most advantageous to transfer your taxable accounts into Roth IRAs as you will be taxed at your current rate on the conversion.
Roth IRAs are taxed at the time of opening, leaving all future gains and withdrawals tax-free.
Capital Gains
Similar to the presence of varying income tax brackets, there are varying capital gains tax brackets as well.
While your income tax rate is lower than it could be in the future or was before retirement, selling off stocks that have made substantial increases in recent years can result in a 0% capital gains tax if your income level falls in the 10 or 12% income tax bracket.
Otherwise, most individuals will pay a 15% federal capital gains tax.
RMDs and Retirement Accounts
Once you reach RMD age, the government requires that RMDs be withdrawn by Dec. 31st (a few exceptions apply).
While you must make these withdrawals, this doesn’t stop you from reinvesting this money within the same year.
For example, funding a solo 401(k) with the income from miscellaneous sources, self-employment endeavors could potentially offset all or part of your RMD requirements, reducing your tax bill drastically.
QCDs (Qualified Charitable Distributions)
Making charitable donations directly from your IRAs allows you to reduce your gross income for the year and your tax bill along with it. Donating from other sources may reduce your taxable income, still lowering your annual tax bill.
Like RMDs, your QCDs must be made by December 31st of the year for which the taxes apply.
Not all tax-saving strategies will be beneficial or worthwhile for all investors. Before biting the bullet on any aforementioned or additional methods for tax-bill reduction, it is wise to speak with a financial professional who can assist with weighing options and outcomes.
To schedule a complimentary financial review with Moore’s Wealth Management, click here or call our office at 770-535-5000, where a staff member is awaiting your call Monday through Friday, 9 AM to 5 PM.
Sources:
[1] https://www.kiplinger.com/retirement/tax-moves-retirees-should-consider-before-end-of-year
[2] https://steward.mooreswealthmanagement.com/all-about-rmds/
All information contained herein is derived from sources deemed to be reliable, but cannot be guaranteed. This material is provided as a courtesy and for educational purposes only. This material is provided as a courtesy and for educational purposes only.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Conversions from IRA to Roth may not be suitable for everyone. Withdrawals are subject to ordinary income tax and prior to age 59 ½, may be subject to a 10% federal tax penalty. Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax-free, and subsequent conversions will require their own 5-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to complete a conversion.
Individuals are encouraged to consult their tax and legal advisors (a) before establishing or changing a Retirement Account or Retirement Plan, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account or Retirement Plan. Tax laws are complex and subject to change.
Steward Partners, its affiliates, and its Financial Advisors do not offer tax or legal advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
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