5 Ways to Save Taxes In Retirement

Keep contributing to an IRA. Did you know that you can keep contributing to an IRA no matter how old you are? The IRS changed the rules so that after 2020 you can continue contributing to an IRA at any age as long as you or your spouse has earned income (wages) for that year and it is under $125,000. At age 72 you have to start taking RMD’s (required minimum distributions) out of your account, but if you have earned income you could be contributing to your account at the same time you are takin money out, essentially zeroing out your tax liability for the year. This is another great reason to open up a small business in retirement.

Sell losses and gains in the same year to negate each other. If you have shares of mutual funds, ETFs, or individual stocks that have done well and some that have not done well, you can sell them in the same year, and they will cancel each other’s tax liability out, dollar for dollar. You can also sell losses to count against your ordinary income tax in the amount of $3,000/year and you can carry losses forward to future years. Sometimes there’s a silver lining to that underperforming stock.

Use a Roth IRA. The Roth IRA is the premier tax-avoiding vehicle, and I recommend it to all my clients who still have earned income and can contribute to it (you have to make less than $125,000 if single or $198,000 if married to make the full contribution). You won’t be able to deduct it on your taxes in the year of the contribution, but when you take the money out in retirement or after age 59 1/2, it will be tax-free! There is also no RMD requirement, so you don’t have to start taking the money out at age 72 if you don’t want to.

Gift your RMDs to the charity of your choice. If you are already giving money to your church and you are taking RMD’s (after age 72), it is better to gift your RMD’s directly to your church and doing so bypasses the taxes altogether. For instance, if you are taking out $10,000/year in RMD’s and your tax bracket is 24%, you are paying $2,400 in taxes on that and you have $7,600 left to give to the church. However, if you have your financial advisor pay the RMD’s directly to the charity/non-profit out of your IRA, then you don’t pay any taxes on it, nor does the charity. Therefore, they get the full $10,000 amount and you owe no taxes.

Gift appreciated stock. You can also do the same thing with appreciated stock in a brokerage account. If you own shares of a mutual fund, ETF, or individual stock that have appreciated a lot, then you will be liable for a large tax on the capital gains whenever you sell. You can avoid these taxes altogether by simply gifting the stock to the charity of your choice. They can then sell the stock and use the proceeds with no tax liability.

These are just some basic ways you can save on taxes in retirement. There are many more techniques and strategies we can help you plan for and implement at American Financial Planning. This is not tax advice. Consult with your tax advisor or us at AFP. We would be happy to give you a free consultation.

As a financial advisor Daniel is passionate about helping people achieve their dreams and greatest potential in life. He enjoys strong coffee, thick books, and long bike rides in his hometown of Roanoke, VA.

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