Tax-Wise Giving and Ways to Lower your Taxes After Retirement

Tax-Wise Giving and Ways to Lower your Taxes After Retirement

What if I told you that there was a way to never pay taxes again when you retire? Well, I’m sorry – I can’t tell you that. But now that I have your attention, there are certainly some ways to lower your tax liability in retirement, particularly as it relates to charitable giving. Let’s look at a few of these strategies:

 

1)      Donating low tax-basis capital assets, such as stocks or mutual funds: How does this work? Generally, when you sell a capital asset, you have to pay taxes on any gains. For example, if you bought 400 shares of a stock (or a mutual fund) at $25, held them for at least one year, then sold them at $30 per share, you would owe taxes on the $5 gain per share (400 shares x $5 gain per share = $2,000 in taxable gain).

Using this example, let’s say you planned to give $12,000 to charitable organizations. Normally, you would just write a check from your checking or savings. However, by donating the stocks at fair market value of $12,000, you get the same tax deduction AND avoid paying capital gains tax. For the charity, it’s the same amount of money. But for you, it’s less taxes.

 

2)      Donating your Required Minimum Distribution (RMD): When you turn age 70 ½, the tax code requires that you begin taking minimum distributions from your pre-tax retirement accounts (Possible exception: 401k plan while still employed). Why can this be a problem? Well, one, you may not need or want the additional funds. And two, these distributions are direct increases to your taxable income.

Rather than receiving these distributions, the tax code allows us to donate up to $100,000 as a “qualified charitable distribution (QCD).” For the receiving charity, they receive the same amount. But for you the taxpayer, your taxable income is reduced by the amount donated.

 

3)      Reducing your living expenses: How does this help? Well, in two major ways. First of all, living on less means you’re taking out less from your retirement accounts. That strategy is a direct reduction of your taxable income and reduces the chance of paying taxes in a higher marginal bracket on a portion of your income.

Secondly, lowering your monthly expenses can reduce the amount of taxes you pay on social security income. (Yes, I know…taxes on social security income after paying into the system all these years? Sadly, yes.) For single tax filers, social security income starts being taxable when “modified adjusted gross income” exceeds $25,000. For married couples, taxes on social security income begins at $32,000. (Be sure to discuss this strategy with your tax preparer as the calculations can be complex.)

 *What’s a sure-fire way to reduce your living expenses in retirement? Being debt-free!

 

4)      Fund Roth 401k’s and Roth IRAs: This strategy particularly applies to our “Accumulator” folks. Why? You have more time to fund retirement accounts that do not require minimum distributions beginning at age 70 ½. Often, we have clients who do not want to take their required minimum distribution but are forced to, increasing their taxable income.

 

These are just a few ways to lower your tax liability in retirement and give in a more tax-wise manner. If we can be of assistance in any way, please don’t hesitate to contact us. We’d love to help.

 

Disclosure: Be sure to discuss these strategies with your CPA or tax preparer as each individual’s tax circumstances are unique. These planning strategies are not considered “tax advice” but merely strategies to consider.

Scott is the founder and a partner at Rivertree Financial Planning. Scott and his wife Helen currently reside in Jackson, MS with their three children Artur, Taylor, and Molly. They are members of Redeemer Church, PCA in Jackson.

Three Things You Can Do to Start Planning for Retirement

Three Things You Can Do to Start Planning for Retirement

To prepare for this writing, I just spent about 30 minutes updating my personal retirement and education savings plan. All the basic facts were there — it just needed some minor tweaking. As a nerd, it’s fun to track progress towards meeting our goals. But, being married to a sweet lady who defines “fun” differently from me, I understand we are all wired differently.

Maybe you or someone you know would like to start planning for retirement, but they don’t know where to start. Whether you’re a nerd or a free spirit, here are three things you can do to start planning for retirement.

1. Take Inventory

There’s no way around organizing what you have. For many, this step is the greatest fear. Why? It’s a reality check. Start with your most recent bank statements and other account statements. Soon to follow would be your tax return and other financial records. We have a one-page checklist that’s extremely helpful. Let us know if you would like to receive it.

2. Know Your Number

No, it’s not the balance of your overall retirement nest egg. I’m talking about the number it takes you to live each month. We have to use certain assumptions when developing retirement plans, such as inflation, rates of return, monthly savings, etc. But we would argue no assumption impacts the success of your plan more than minimizing this number. How do you reduce it? Have a plan to be totally debt-free when you reach your retirement age. We can help.

3. Work with a Professional

I know…but what about online retirement estimators? Sure. You can try it. But know that all aspects needed to develop a sufficient retirement plan are rarely included in these tools. For example, does the online calculator factor in social security maximization strategies, tax-efficient withdrawals strategies, realistic growth rates, etc. You may enjoy managing your own investments and do well with it. So maybe you need a fee-based financial plan to make sure you’re not missing any critical pieces to your plan.

I often say that there is only one guarantee when presenting a retirement plan: It won’t look exactly this way. Life happens, and goals can change. So then why plan? Managed money goes farther….period. As the late Zig Ziglar said, “If you aim at nothing, you’ll hit it every time!” Let’s aim at something. You might be surprised. Schedule a call today so we can help you plan for tomorrow.

Scott is the founder and a partner at Rivertree Financial Planning. Scott and his wife Helen currently reside in Jackson, MS with their three children Artur, Taylor, and Molly. They are members of Redeemer Church, PCA in Jackson.