Navigating Tax Deductions and Credits in Retirement

Introduction

Navigating the complexities of tax deductions and credits is a crucial aspect of retirement planning that can significantly influence your financial well-being in your golden years. As you transition from accumulating wealth to strategically drawing on your retirement savings, understanding how to optimize your tax situation becomes paramount. The right tax strategies can enhance your income longevity, ensuring you have the resources needed to enjoy a comfortable and secure retirement.

Tax planning doesn’t stop when you leave the workforce. In fact, it becomes even more important as your income sources shift and you potentially become eligible for various deductions and credits specifically beneficial to retirees. With the tax landscape continually evolving, staying informed and proactive in your tax planning efforts is essential.

This section of our blog post will provide you with a foundational understanding of the key tax considerations in retirement, including the distinction between deductions and credits and how they can impact your tax bill. We’ll explore the various sources of retirement income and their tax implications, setting the stage for a deeper dive into strategies that can help you minimize your tax liability while maximizing your financial security.

Remember, effective tax planning is a cornerstone of a successful retirement strategy. By leveraging the tax benefits available to you, you can not only reduce your tax burden but also ensure a more stable and prosperous retirement. Stay tuned as we unpack the intricacies of tax deductions and credits in retirement, empowering you with the knowledge to make informed decisions about your financial future.

Understanding the Basics

Before diving into the specific tax deductions and credits that can benefit retirees, it’s crucial to establish a clear understanding of some fundamental tax concepts. This foundation will enable you to navigate the retirement tax landscape more effectively and make informed decisions about your tax planning strategies.

Tax Deductions vs. Tax Credits

• Tax Deductions: These reduce your taxable income, which is the portion of your income that’s subject to taxes. The value of a deduction depends on your marginal tax rate; the higher your tax bracket, the more valuable the deduction. Common deductions include mortgage interest, charitable contributions, and certain medical expenses.
• Tax Credits: These provide a dollar-for-dollar reduction in the amount of taxes you owe, making them potentially more valuable than deductions. Tax credits can be refundable or non-refundable. A refundable tax credit can result in a refund if the credit exceeds the amount of taxes owed, while a non-refundable credit only reduces the tax bill to zero.

How Retirement Income is Taxed

Retirement income can come from various sources, each with its own tax implications:

• Social Security Benefits: The taxation of Social Security benefits depends on your combined income, which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Depending on your income level, up to 85% of your benefits may be taxable.
• Retirement Account Withdrawals: Money withdrawn from traditional IRAs and 401(k)s is typically taxed as ordinary income. In contrast, withdrawals from Roth IRAs and Roth 401(k)s are tax-free if certain conditions are met.
• Pensions: Most pensions are taxable as ordinary income, though some portions may be tax-exempt if you contributed post-tax dollars to the pension plan.
• Investment Income: This can include interest, dividends, and capital gains, each subject to different tax rates. Qualified dividends and long-term capital gains benefit from lower tax rates compared to ordinary income.

Understanding these basics is the first step in crafting a tax-efficient retirement strategy. By recognizing the different types of tax deductions and credits, as well as the tax treatment of various income sources, retirees can better assess how to reduce their tax liability and preserve their retirement savings. In the following sections, we’ll explore specific deductions and credits that retirees should consider, as well as strategies for managing retirement account withdrawals and other aspects of retirement income planning.

Common Tax Deductions for Retirees

As you navigate your retirement years, understanding and leveraging tax deductions can significantly reduce your taxable income and, by extension, your tax liability. For retirees, some deductions become more pertinent and potentially more valuable. Here’s a closer look at common tax deductions that retirees should be aware of and consider incorporating into their tax planning strategies.

Standard Deduction for Retirees

• The standard deduction is a fixed amount that reduces your taxable income. For retirees, especially those aged 65 and older, the standard deduction is higher than for younger taxpayers, providing an immediate benefit in reducing taxable income.
• It’s important to note that if you or your spouse are 65 or older, you’re eligible for an additional standard deduction amount, which can further lower your tax liability.

Medical and Dental Expenses

• One of the more significant deductions for retirees pertains to medical and dental expenses. As healthcare costs can rise with age, the ability to deduct these expenses can offer substantial tax relief.
• You can deduct unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). This includes a wide range of expenses, from health insurance premiums (if not deducted elsewhere) to long-term care services.

Property Tax and Mortgage Interest

• If you itemize deductions, you can include property taxes and mortgage interest as deductible expenses. While many retirees may have paid off their mortgages, those who haven’t can still benefit from this deduction.
• Additionally, real estate taxes paid on your primary residence or any other property you own can be deductible, providing another avenue to reduce taxable income.

Charitable Contributions

• Charitable contributions remain a valuable deduction for retirees, particularly for those who are charitably inclined. Contributions to qualified charitable organizations can be deducted if you itemize, with limits based on a percentage of your AGI.
• For those taking the standard deduction, a special provision allows for a limited charitable cash contribution deduction. This is particularly relevant for retirees who may not have enough deductions to itemize but still make charitable donations.

Investment-Related Expenses

• While the Tax Cuts and Jobs Act of 2017 limited deductions for investment expenses, retirees might still find certain investment-related expenses deductible. For instance, expenses related to the production of investment income, such as fees for investment advisory services, can be included as part of your miscellaneous deductions, subject to certain thresholds.

Selling Your Home

• If you sell your home, the capital gains exclusion can be a significant benefit. Married couples filing jointly can exclude up to $500,000 of gain from their income, and single filers can exclude up to $250,000, provided certain conditions are met, such as living in the home for at least two of the five years preceding the sale.

Leveraging these deductions requires careful planning and record-keeping. Retirees should maintain detailed records of their medical expenses, charitable contributions, and any other deductible expenses throughout the year. Consulting with a tax professional can also provide personalized advice tailored to your unique financial situation, ensuring you maximize your deductions and minimize your tax liability in retirement.

Tax Credits to Consider

While tax deductions lower your taxable income, tax credits directly reduce the amount of tax you owe, making them especially valuable. For retirees, there are specific credits that can be leveraged to decrease tax liability, some of which may be more applicable in retirement than during your working years. Here, we delve into notable tax credits that retirees should be aware of and consider when planning their taxes.

Credit for the Elderly or the Disabled

• One of the key tax credits available to retirees is the Credit for the Elderly or the Disabled. This credit is designed for individuals who are 65 years of age or older, or those who are retired on permanent and total disability and have received taxable disability income for the tax year.
• To qualify, your income must fall below certain limits, and you must meet specific criteria regarding your filing status and the amount of non-taxable Social Security, pensions, annuities, or disability income you receive. The credit can range from $3,750 to $7,500, making it a substantial benefit for those who qualify.

Retirement Savings Contributions Credit (Saver’s Credit)

• The Retirement Savings Contributions Credit, commonly known as the Saver’s Credit, is aimed at low- to moderate-income individuals who contribute to retirement accounts such as IRAs or employer-sponsored retirement plans.
• The credit is worth between 10% to 50% of your contributions, up to $2,000 for individuals and $4,000 for married couples filing jointly, with the exact percentage depending on your adjusted gross income. This credit encourages continued savings in retirement, especially for part-time workers or those with self-employment income.

Earned Income Tax Credit (EITC)

• While the Earned Income Tax Credit (EITC) is typically associated with working individuals and families, retirees with part-time jobs or self-employment income may also qualify. The EITC is designed to benefit those with lower income levels, providing a refundable credit that can result in a refund if the credit amount exceeds the taxes owed.
• Eligibility for the EITC depends on your income, filing status, and whether you have qualifying children. Even modest earnings from part-time work or self-employment in retirement could make you eligible for this credit, providing an additional financial boost.

Other Credits

• Depending on your specific financial situation, other tax credits may also be applicable. For example, if you install energy-efficient improvements in your home, you might qualify for the Residential Energy Efficient Property Credit.
• Additionally, if you continue to pay mortgage interest, the Mortgage Interest Credit designed for low-income individuals could also be beneficial.

It’s important for retirees to review their eligibility for these and other tax credits each year, as changes in income and life circumstances can affect eligibility. Leveraging tax credits can significantly reduce your tax burden, potentially resulting in substantial savings. As with all tax matters, consulting with a tax professional can provide clarity and ensure that you’re taking full advantage of the credits available to you, thereby optimizing your tax situation in retirement.

Retirement Account Strategies

Proper management of retirement accounts is a cornerstone of tax-efficient retirement planning. The decisions retirees make regarding their retirement accounts can have significant tax implications, affecting both their current tax liability and their financial security in the long run. This section explores various strategies related to withdrawals, Roth conversions, and managing Required Minimum Distributions (RMDs) from retirement accounts.

Timing Withdrawals for Tax Efficiency

• Strategic Withdrawals: Timing is everything when it comes to withdrawing from retirement accounts. By carefully planning the timing and order of withdrawals from taxable, tax-deferred, and tax-free accounts, retirees can manage their tax brackets more effectively, potentially reducing their overall tax liability.
• Tax Bracket Considerations: Understanding your current tax bracket and projecting your future tax situation is crucial. In some cases, it may make sense to withdraw more in years when you’re in a lower tax bracket to minimize taxes over the long term.

Roth IRA Conversions

• Conversion Strategies: Converting a traditional IRA to a Roth IRA can offer tax-free growth and withdrawals in retirement. However, the amount converted is taxable in the year of the conversion. Careful planning is needed to determine if and when a Roth conversion makes sense, considering your current and future tax situation.
• Long-Term Benefits: While the upfront tax cost of a Roth conversion can be significant, the long-term benefits of tax-free growth and withdrawals can outweigh the initial tax hit, especially if you expect to be in a higher tax bracket in the future or if the account is intended for your heirs.

Required Minimum Distributions (RMDs)

• Understanding RMDs: Once you reach a certain age, currently 72, you are required to start taking minimum distributions from your tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. These distributions are taxable and can significantly impact your tax liability in retirement.
• Planning for RMDs: Effective RMD planning involves considering how these mandatory withdrawals will affect your tax bracket and overall tax situation. In some cases, it may be beneficial to start withdrawals earlier or explore strategies like Qualified Charitable Distributions (QCDs) to manage the tax impact.

Qualified Charitable Distributions (QCDs)

• Charitable Giving with RMDs: QCDs allow individuals over a certain age to donate up to a specified amount directly from their IRA to a qualified charity. This amount counts toward your RMD but is not included in your taxable income, providing a tax-efficient way to fulfill charitable intentions.

Tax Diversification

• Balancing Account Types: Maintaining a mix of taxable, tax-deferred, and tax-free accounts can provide greater flexibility in managing taxes in retirement. This diversification allows you to choose from which accounts to withdraw based on your current tax situation, potentially lowering your overall tax burden.

Retirement account strategies play a critical role in tax planning for retirees. By understanding the nuances of withdrawals, Roth conversions, and RMDs, you can make informed decisions that align with your overall financial goals and tax situation. Given the complexity of these decisions and their long-term implications, consulting with a financial advisor or tax professional is advisable to tailor these strategies to your individual needs and circumstances.

Social Security Taxation

Understanding how Social Security benefits are taxed is essential for effective retirement tax planning. For many retirees, Social Security represents a significant portion of their retirement income, and the taxation of these benefits can impact overall financial strategies. This section covers the basics of Social Security taxation and strategies to minimize taxes on these benefits.

Taxation of Social Security Benefits

• Provisional Income Calculation: The taxation of Social Security benefits depends on your “provisional income,” which includes your adjusted gross income (AGI), non-taxable interest, and half of your Social Security benefits. Depending on the total, a portion of your benefits may be taxable.
• Tax Thresholds: If your provisional income is above certain thresholds, up to 50% or 85% of your Social Security benefits may be subject to federal income tax. Understanding these thresholds is crucial for planning purposes.

Strategies to Reduce Taxes on Benefits

• Manage Withdrawal Rates: By carefully planning withdrawals from other retirement accounts, you can manage your provisional income level. This might involve balancing withdrawals from taxable and tax-deferred accounts to stay below the thresholds that increase the taxable portion of your Social Security benefits.
• Roth Conversions: Converting funds from a traditional IRA to a Roth IRA in years prior to collecting Social Security can reduce future RMDs and potentially lower the taxable portion of Social Security benefits. This strategy requires careful planning to ensure the conversions don’t push you into a higher tax bracket.
• Delaying Social Security Benefits: Delaying the start of Social Security benefits not only increases the benefit amount but can also provide more flexibility in managing other retirement income to minimize taxes. Waiting until full retirement age or beyond allows for more strategic planning with other income sources.

Impact of Working in Retirement

• Earnings Test: For retirees who continue to work, the Social Security earnings test may temporarily reduce benefits if earnings exceed certain thresholds before reaching full retirement age. Understanding the interaction between work income and Social Security can aid in tax planning.
• Tax Implications: Income from part-time work can increase your provisional income, potentially leading to a higher portion of your Social Security benefits being taxed. Balancing work income and withdrawals from retirement accounts can mitigate this impact.

State Tax Considerations

• State Taxes on Social Security: In addition to federal taxes, some states also tax Social Security benefits. Knowing your state’s policy on Social Security taxation is important for comprehensive tax planning.

Coordinating with Other Income Sources

• Holistic Approach: Effective tax planning involves considering all sources of income in conjunction with Social Security. Coordinating withdrawals from retirement accounts, pension income, and part-time work income can optimize your tax situation and reduce the taxable portion of Social Security benefits.

Navigating the taxation of Social Security benefits requires a strategic approach, considering both federal and state tax implications. By understanding the rules and employing strategies to manage provisional income, retirees can minimize the tax impact on their Social Security benefits, enhancing their overall financial well-being in retirement. As always, consulting with a tax professional or financial advisor can provide personalized guidance tailored to your specific situation.

Investment Income and Capital Gains

For many retirees, investment income becomes a primary source of funds, making the understanding of its tax implications crucial for efficient financial planning. This section delves into how investment income, including interest, dividends, and capital gains, is taxed and offers strategies to manage these investments in a tax-advantaged manner.

Interest Income

• Taxation of Interest: Interest income, such as that from savings accounts, CDs, and bonds, is generally taxed as ordinary income at your marginal tax rate. It’s important for retirees to account for this when estimating their annual tax liability.
• Tax-Exempt Bonds: Consider incorporating tax-exempt bonds or municipal bonds into your portfolio. The interest from these bonds is usually exempt from federal income tax and, in some cases, state and local taxes, offering a tax-advantaged income source.

Dividend Income

• Qualified vs. Non-Qualified Dividends: Dividends are classified as either qualified or non-qualified. Qualified dividends, which come from stocks held for a specific period, are taxed at the favorable long-term capital gains rates, whereas non-qualified dividends are taxed as ordinary income.
• Strategic Holding Periods: Ensure that you meet the holding period requirements for dividends to be considered qualified, thereby benefiting from lower tax rates.

Capital Gains

• Long-Term vs. Short-Term: Capital gains are the profits from the sale of an investment and are classified as long-term or short-term. Long-term capital gains, from investments held for more than a year, are taxed at lower rates compared to short-term gains, which are taxed as ordinary income.
• Harvesting Losses: Tax-loss harvesting involves selling investments at a loss to offset capital gains. This strategy can reduce your taxable income and manage your tax bill. However, be mindful of the “wash sale” rule, which disallows a tax deduction for a security sold in a loss and repurchased within 30 days.

Real Estate Investments

• Rental Income: Rental income is taxed as ordinary income, but retirees can deduct expenses associated with rental property management, maintenance, and depreciation, potentially reducing taxable income.
• Selling Real Estate: When selling real estate investments, consider the impact of capital gains and the possibility of using the 1031 exchange, which allows for the deferral of capital gains taxes if the proceeds are reinvested in a like-kind property.

Managing Your Investment Portfolio

• Asset Location: Utilize tax-efficient asset location strategies by holding investments that produce taxable income, such as bonds, in tax-deferred accounts, and investments with tax-advantaged income, like qualified dividends and long-term capital gains, in taxable accounts.
• Regular Portfolio Review: Regularly review your investment portfolio with a tax perspective in mind, considering the tax implications of rebalancing and the potential benefits of strategies like tax-loss harvesting.

Investment income and capital gains play a significant role in a retiree’s financial picture. By understanding the tax characteristics of different types of investment income and employing strategies to manage the tax impact, retirees can enhance their after-tax investment returns, contributing to a more secure and sustainable financial future in retirement.

Estate Planning Considerations

Estate planning in retirement is not only about ensuring your assets are distributed according to your wishes but also about managing the potential tax implications for you and your heirs. This section addresses key tax considerations in estate planning, focusing on strategies that can minimize tax liabilities and preserve more of your wealth for future generations.

Understanding Estate Taxes

• Federal Estate Tax: The federal estate tax applies to the transfer of property at death, with rates that can be significant. However, there is a substantial exemption amount, meaning many estates will not owe federal estate tax. It’s crucial to stay updated on current exemption thresholds and tax rates as these can change with new tax legislation.
• State Estate and Inheritance Taxes: Some states impose their own estate or inheritance taxes, with varying exemption levels and rates. Be aware of the rules in your state and consider their impact on your estate planning.

Gifting Strategies

• Annual Gift Tax Exclusion: You can give a certain amount per recipient per year without incurring gift tax or using any of your lifetime estate and gift tax exemption. Consider using this annual exclusion as a strategy to reduce the size of your taxable estate while benefiting your heirs during your lifetime.
• Lifetime Exemption: Beyond the annual exclusion, gifts count against your lifetime exemption from the federal estate and gift tax. Strategic use of this exemption can be a powerful tool in estate planning.

Charitable Contributions

• Charitable Giving: Leaving a portion of your estate to charity can not only fulfill philanthropic goals but also provide tax benefits. Charitable bequests are deductible from the value of your estate, potentially reducing estate taxes.
• Charitable Trusts: Tools like charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) can offer tax-efficient ways to make significant charitable gifts while also providing financial benefits to you or your heirs.

Trusts and Other Estate Planning Vehicles

• Revocable vs. Irrevocable Trusts: Trusts can be a central element of estate planning, offering control over asset distribution and potential tax advantages. While revocable trusts allow for flexibility and control during your lifetime, irrevocable trusts can provide tax benefits and asset protection but require you to relinquish control over the assets placed in the trust.
• Advanced Strategies: For larger estates, more complex strategies like family limited partnerships (FLPs) or irrevocable life insurance trusts (ILITs) can be useful in reducing estate taxes and providing for heirs in a tax-efficient manner.

Planning for Retirement Accounts

• Beneficiary Designations: Ensure your retirement accounts have up-to-date beneficiary designations, as these assets typically pass outside of your will. Consider the tax implications for beneficiaries, especially with accounts like traditional IRAs, where inherited balances will be taxable to the recipient.

Regular Review and Professional Guidance

• Keep Your Plan Current: Estate planning is not a “set it and forget it” matter. Regular reviews are essential, especially as tax laws change and personal circumstances evolve.
• Consult with Experts: Estate planning involves complex legal and tax considerations. Working with experienced estate planning attorneys and tax professionals can ensure that your plan effectively meets your goals and complies with current laws.

Estate planning is a critical aspect of retirement planning, offering opportunities to reduce taxes, protect assets, and ensure that your legacy is passed on according to your wishes. By incorporating tax-efficient strategies into your estate plan, you can maximize the benefits for yourself and your heirs, ensuring that your financial planning efforts have a lasting impact.

Staying Informed and Adaptable in Retirement Tax Planning

Embrace Continuous Learning

• Stay Updated: Tax laws and financial regulations change frequently. Staying informed about these changes is vital to ensuring your retirement tax planning strategies remain effective and compliant.
• Educational Resources: Utilize resources such as IRS publications, reputable financial news outlets, and continuing education courses focused on retirement planning and tax law.

Building a Support Network

• Professional Advisors: Establishing a relationship with financial advisors and tax professionals who specialize in retirement planning can provide you with personalized advice and keep you informed of relevant changes in tax legislation.
• Peer Networks: Engage with peer groups, such as retirement planning workshops or online forums, to share experiences and strategies that have been effective for others in similar situations.

Regular Review and Adjustment

• Annual Reviews: Conduct regular reviews of your financial plan and tax strategies to ensure they align with current laws and your evolving financial situation.
• Adaptability: Be prepared to adjust your strategies in response to new tax laws, changes in your income or expenses, and significant life events that may impact your retirement planning.

Leveraging Technology

• Financial Planning Software: Utilize software tools and apps designed for retirement and tax planning to analyze your financial situation, project future scenarios, and adjust your strategies accordingly.
• Online Resources: Take advantage of online tax planning resources, calculators, and platforms that offer up-to-date information and guidance on retirement tax planning.

Engaging in Policy Advocacy

• Stay Informed on Policy Changes: Keep abreast of potential policy changes that could affect retirement taxes and consider engaging in advocacy efforts to support policies beneficial to retirees.
• Community Involvement: Participate in community or national organizations that advocate for the interests of retirees, contributing to a collective voice that can influence tax and retirement policy.

Conclusion

Retirement tax planning is not a one-time task but a continuous process that requires staying informed, adaptable, and proactive. By embracing continuous learning, building a support network, regularly reviewing your financial strategies, leveraging technology, and engaging in policy advocacy, you can navigate the complexities of retirement taxes more effectively. This dynamic approach ensures that your retirement planning remains robust, responsive, and aligned with your long-term financial goals, allowing you to enjoy a more secure and fulfilling retirement.

Frequently Asked Questions

Q1: How are Social Security benefits taxed?

A: The taxation of Social Security benefits depends on your combined income, which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. If your combined income exceeds certain thresholds, up to 85% of your Social Security benefits may be taxable.

Q2: What is the difference between a tax deduction and a tax credit?

A: A tax deduction reduces your taxable income, potentially lowering your tax bracket and the amount of tax you owe. A tax credit directly reduces the amount of tax you owe, dollar for dollar. Credits are generally more beneficial than deductions of the same amount because they directly reduce your tax liability.

Q3: Can I still contribute to a retirement account and claim the Saver’s Credit in retirement?

A: Yes, if you have earned income (from part-time work, self-employment, etc.) and meet the income requirements, you can contribute to a retirement account and may be eligible for the Retirement Savings Contributions Credit, also known as the Saver’s Credit.

Q4: What strategies can I use to minimize taxes on Required Minimum Distributions (RMDs)?

A: To minimize taxes on RMDs, consider strategies such as donating your RMD to charity through a Qualified Charitable Distribution (QCD), which can satisfy your RMD requirement without increasing your taxable income. Additionally, strategic withdrawal planning from different account types before RMD age can help manage your tax bracket.

Q5: Are there any tax deductions specifically beneficial to retirees?

A: Yes, retirees may benefit from higher standard deductions, medical and dental expense deductions (if expenses exceed 7.5% of AGI), and deductions for investment-related expenses, among others. It’s important to review your expenses and consult a tax professional to maximize your deductions.

Q6: How do I handle taxes if I plan to move to a different state in retirement?

A: State tax laws vary widely, so it’s crucial to research the tax implications in your new state. Consider factors such as state income tax rates, taxation of retirement income (Social Security, pensions, withdrawals from retirement accounts), property taxes, and any tax credits or exemptions for retirees.

Q7: Can selling my home in retirement provide any tax benefits?

A: Yes, if you’ve lived in your primary residence for at least 2 of the 5 years before selling, you may exclude up to $250,000 (single filers) or $500,000 (married filing jointly) of the capital gains from the sale of your home from your taxable income.

Q8: How do I know if I should itemize deductions or take the standard deduction?

A: Generally, you should itemize deductions if your allowable itemized deductions exceed the standard deduction amount for your filing status. Given the higher standard deduction for retirees, particularly those over 65, it’s important to calculate both options to determine which provides the greater tax benefit.

Retirement Tax Planning Checklist Example

Understand Your Income Sources

• Review all retirement income sources (Social Security, pensions, retirement account withdrawals, investment income, etc.)
• Determine the tax implications of each income source

Optimize Tax Deductions

• Assess eligibility for a higher standard deduction due to age
• Compile medical and dental expenses to evaluate if they exceed 7.5% of your AGI
• Review potential for mortgage interest and real estate tax deductions
• Keep records of charitable contributions for deduction eligibility
• Consider state-specific deductions that may apply to your situation

Leverage Tax Credits

• Evaluate eligibility for the Credit for the Elderly or the Disabled
• If still working part-time, check if you qualify for the Retirement Savings Contributions Credit (Saver’s Credit)
• Determine eligibility for other tax credits, like the Earned Income Tax Credit (EITC)

Manage Retirement Accounts Wisely

• Plan the timing and order of withdrawals from different retirement accounts for tax efficiency
• Consider the benefits and implications of a Roth IRA conversion
• Understand Required Minimum Distributions (RMDs) and plan for their tax impact
• Explore the option of Qualified Charitable Distributions (QCDs) to satisfy RMDs tax-free

Plan for Investment Income and Capital Gains

• Review investment portfolio for tax-efficient asset location
• Utilize tax-loss harvesting to offset capital gains if applicable
• Understand the tax treatment of dividends and capital gains and plan for their impact

State Tax Considerations

• Familiarize yourself with your state’s tax laws regarding retirement income
• Consider the impact of state taxes if planning to relocate in retirement

Estate Planning

• Review and update your estate plan to reflect current tax laws and personal wishes
• Consider the use of trusts, gifting strategies, and charitable contributions for estate tax benefits
• Ensure beneficiary designations are up to date on all retirement accounts and insurance policies

Seek Professional Advice

• Consult with a tax professional or financial advisor to review your tax planning strategy
• Stay informed about tax law changes that may affect your retirement planning

Glossary for Retirement Tax Planning

Adjusted Gross Income (AGI)

The total taxable income after certain deductions (such as IRA contributions, student loan interest, etc.) but before standard or itemized deductions and personal exemptions are applied.

Capital Gains

The profit from the sale of an asset, such as stocks or real estate, where the sale price exceeds the purchase price. Capital gains are categorized as long-term or short-term based on the holding period of the asset.

Credit for the Elderly or the Disabled

A tax credit available to taxpayers who are 65 or older, or who are under 65 but are permanently and totally disabled, and meet certain income limits.

Itemized Deductions

Expenses allowed by the IRS that can be deducted from AGI to reduce taxable income. They include expenses such as mortgage interest, state and local taxes, medical expenses, and charitable contributions.

Qualified Charitable Distribution (QCD)

A direct transfer of funds from your IRA, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, while excluding the amount donated from taxable income.

Required Minimum Distributions (RMDs)

The minimum amount you must withdraw from your retirement accounts annually starting at age 72 (or 70½ if you reached 70½ before January 1, 2020).

Retirement Savings Contributions Credit (Saver’s Credit)

A tax credit for eligible contributions to IRA or employer-sponsored retirement plan. It’s available to low- and moderate-income taxpayers, providing an incentive to save for retirement.

Roth Conversion

The process of transferring assets from a traditional IRA or 401(k) to a Roth IRA, which results in the assets being taxed in the year of the conversion, but allows for tax-free growth and withdrawals in the future.

Standard Deduction

A fixed dollar amount that reduces the income on which you are taxed. The standard deduction varies depending on filing status, age, and whether you or your spouse is blind.

Tax Bracket

The range of incomes taxed at a particular rate. U.S. tax rates are progressive, so as income increases, it is taxed at higher rates.

Tax Credit

An amount that taxpayers can subtract directly from taxes owed to the government. Unlike deductions, which reduce taxable income, credits reduce taxes owed on a dollar-for-dollar basis.

Tax Deduction

An expense that can be subtracted from adjusted gross income to reduce the total income subject to tax.

Tax-Exempt Bonds

Bonds issued by municipal, county, or state governments, the interest from which is exempt from federal income tax, and in some cases, state and local taxes.