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5 Tax Planning Tips for Retirees

5 Tax Planning Tips for Retirees

October 28, 2021

It's a frequent myth that once you retire, your tax bills will decrease, your tax returns will get simpler, and tax preparation will become obsolete. For some, this may be true, but for others, the combination of Social Security, pensions, and withdrawals from retirement accounts boosts their retirement income and may potentially drive them into a higher tax bracket.

Five Tax Planning Tips for Retirees

Consider these five tax-planning tips if you're retired or about to retire:

  1. Take inventory. Estimate how much money you'll need for living expenses in retirement and make a list of your income sources. Taxable assets, such as mutual funds and brokerage accounts; tax-deferred assets, such as IRAs, 401(k) plan accounts, and pensions; and nontaxable assets, such as Roth IRAs, Roth 401(k) plans, and tax-exempt municipal bonds, are examples of these sources. Depending on your other sources of income, your Social Security benefits may be nontaxable or partially taxable.
  2. Develop a strategy for drawing retirement income in a tax-efficient way, taking into account any state income taxes that may apply. For example, you could reduce current taxes by first tapping nontaxable assets, then capital gains assets, and deferring withdrawals from tax-deferred accounts as long as possible. Keep in mind that your Social Security benefits will become partially taxable if your other income exceeds certain levels. Married couples filing jointly with a combined income of more than $44,000, for example, may be taxed on up to 85% of their Social Security benefits. (Adjusted gross income + nontaxable interest plus half of Social Security payments equals combined income.)
  3. Make charitable contributions that are tax-deductible. RMDs from tax-deferred retirement funds must begin once you reach the age of 72 (up from 70 1/2 for those born before July 1, 1949), though you can defer your first distribution until April 1 of the year after your 72nd birthday. RMDs are normally taxed like ordinary income and must be taken whether or not you need the money. A hefty RMD, as mentioned in No. 1, can drive you into a higher tax rate. Making a qualifying charitable contribution (QCD) is one way to reduce your RMDs.  A QCD permits you to contribute up to $100,000 tax-free immediately from an IRA to a qualifying charity and put that amount toward your RMDs if you're age 70 1/2 or older (this age did not increase when the RMD age increased). Because the funds aren't counted as part of your income, you won't have to pay taxes on the whole amount, regardless of whether you itemize. Furthermore, the income-based charitable deduction limits do not apply. Any sum deducted from your income as a result of the QCD is also deducted from your charitable deduction.
  4. Make projected tax payments. Income taxes may or may not be withheld from your retirement income sources. Estimate whether your withholdings will be sufficient to satisfy your tax liability for the year and make quarterly tax payments to cover any predicted shortfall to avoid tax shocks and penalties.
  5. Keep track of your medical bills. Medical costs are only deductible if you itemize your deductions, and only to the extent that they exceed 7.5 percent of your adjusted gross income. Keep careful track of your medical expenses if you have a lot of them. If you surpass or are about to exceed this level, consider bundling elective expenses throughout the year to optimize potential deductions.

Our Financial Planners can Help

Contact one of our professionals if you're approaching retirement age and have questions about how your tax status might change.