One of the great things about having someone that does your taxes each year is… well… you don’t have to do your taxes each year! Who wants to be an expert on federal and state income taxes? The bad news is that most accountants and CPAs are incredibly busy each year attempting to finish everyone’s return by the deadline. They aren’t necessarily thinking to themselves, “how can I help this client save on taxes?”. That’s a shame because they are a wealth of knowledge which could be tapped if there was opportunity.
Since you’re in the retirement phase, you’re probably very interested in saving money on taxes so that you’ll have more to spend each year. Let me give you a couple of ideas to consider.
Even if you don’t need it, distribute money each year out of your IRA accounts if it is in the lowest tax brackets.
You don’t have to wait until age 72 when the government tells you that you have to take money out of your account each year. Even if you don’t need the money, you can distribute money out of the IRA account so that you take advantage of a low tax rate. There is a 10% and 12% federal tax rate that are historically extremely low that you want to take advantage of. I highly doubt that these tax rates are going to go down in the future. In fact these tax rates are set to sunset and revert back to higher rates in 2026. The money you distribute can go into a similar investment in a non-retirement account so that it keeps compounding.
If you are charitably inclined, do your giving directly out of your IRA accounts after you reach the age of 70 1/2.
Current tax law makes it challenging to get tax credit for charitable giving since most filers are taking the higher standard deduction and charitable contributions are deductible only for those who itemize. When you get to the age of 70 1/2, though, you can do your charitable giving directly to the charity out of your IRA account. The distribution out of the IRA account will not be taxable and will reduce your taxable income, assuming you used to give to charity out of your cash flow. It will also help you meet your Required Minimum Distribution (post 72). The money that you used to give you can put into a non-retirement investment account each month so that the total amount of your investments stays constant.
Creatively use Housing Wealth to reduce taxes and retirement.
Using a Home Equity Conversion Mortgage (current name of the Reverse Mortgage program) wisely can help reduce taxes since all distributions are not taxable. Options include taking lifetime tax-free income instead of taxable income from IRAs or using proceeds to pay for the taxes on Roth conversions each year. Having a source of tax-free funds as a backup or safety net as an alternative to taking taxable distributions from IRA accounts can come in handy with proper planning.
As with all tax planning, make sure to work with your accountant or CPA along with a financial advisor to make sure that there aren’t any unintended results or consequences of your strategy.
If you have any questions, feel free to contact me.