Help Me Retire Podcast - Episode 32

Keeping more of what's yours at tax time

Show notes:

It’s hard enough making your money last as long as you do once you retire... and it’s even harder to do... when you’re paying too much in taxes...

In today’s episode of the Help Me Retire Podcast... consider the following three strategies to help you stop paying more to the IRS... than you have to...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

The IRS is not a charity... and if you’re send them more of your money than you should... because you probably don’ t have a tax strategy... that’s not playing it safe... that’s not smart... it’s just wasteful...

So, we’re going to talk about three ideas... three ways you might be able to mitigate taxes on your retirement income...

The first one has to do with understanding tax brackets... and avoiding the mistake of stumbling into a higher one unnecessarily...

When you’re working... it’s all pretty simple...

Earn as much as you can... save some in your 401-k or IRA... your employer withholds income taxes on the rest... and come April every year... you file your return...

But once you retire... you’re in charge of the payroll department...

You decide when to take Social Security... how much to withdraw from your IRA... when to sell investments... whether to do Roth conversions...

And each of those decisions... changes your taxable income...

So, what we want to do... is called playing the long game... by spreading your taxable income across several years... instead of having these big spikes in any given year...

When you have those big income years... it might make more of your Social Security taxable... it can make Medicare more expensive... it can push you into higher tax brackets... and even impact the rate you pay on capital gains and dividend income...

But once you understand tax brackets... and how much more income you can take without moving into a higher one... it’ll be easier to help control your taxable income year over year... and avoid those big spikes...

Now, there’s a special opportunity for people... between the year they retire... and age 73... when required minimum distributions start...

We call it... the golden window... when you can decide how much money to withdraw from your IRAs... voluntarily...

In the early years of retirement... your income might be somewhat lower than when you were working... you might even be in a lower tax bracket...

But if you’ve got a lot of money in traditional IRAs... you might find yourself in the opposite situation... when your RMDs are more than you need for spending... and you get pushed into a higher tax bracket...

One strategy for mitigating that risk... is to think about converting some of that traditional IRA money into a Roth IRA... maybe just enough to keep you in your current tax bracket...

Tax advisors call this strategy... filling the bracket...

Now, of course... IRA distributions are taxable... this is going to mean paying more taxes this year than you have to...

But every time you do one of these conversions... it’s going to reduce the amount of money in the traditional IRA... and lower what your RMDs might have been in the future...

And don’t overlook the fact that once the money is inside a qualified Roth IRA... it’s able to grow tax-free... and there are no RMDs...

That could give you a lot of flexibility when it comes to managing your taxable income...

So... idea number one today... instead of asking... “How do I pay as little tax as possible this year?”... ask... “How can I pay as little tax as possible over the rest of my life?

Another strategy to help you mitigate taxes in retirement... has to do with timing... because in retirement... when you take income can be just as important as how much...

Think of every year’s income... as a box you’re getting ready to mail...

The more you cram into it... the higher rate you’ll pay to ship it...

If you load up a lot of income into one year... again... it could mean a higher tax rate... it could trigger surcharges on future Medicare premiums... it could make more of your Social Security income taxable... it could increase the tax you pay on capital gains and dividend income... and it could trigger surtaxes you wouldn’t otherwise pay... while potentially taking away some deductions and tax credits...

We see people make this mistake... especially right after they retire...

They get a big 401-k retirement plan distribution... and they’re tempted to take out a big chunk right away to pay off the mortgage... buy a new car... make big home improvements... or take a nice trip somewhere...

Nothing wrong with that... but if you do some planning... you can spread those expenses out over several years... and avoid a big, expensive tax year...

Another timing strategy... involves when to claim Social Security benefits...

Think about this... if you can afford to delay Social Security... it keeps your income that much lower... potentially creating more room for Roth IRA conversions at lower tax brackets...

Once you start getting Social Security income... that extra room... that opportunity... gets smaller... you lose some flexibility...

A big spike in income can also trigger something called IRMAA... a surtax on top of what you pay for Medicare Part B and Part D... that’s based on your taxable income...

There’s a two-year lookback period for IRMAA... meaning that whatever income you realize this year... will impact what you pay for Medicare two years later... and it gets recalculated every year...

That makes planning a little more complicated... but all the more important...

So, here are some questions you should consider asking yourself and your tax advisor every year... that have to do with timing...

• Do I have any room left in my current tax bracket?

• Should I do a Roth conversion this year... and if so... how much?

• Am I about to trigger higher Medicare premiums?

• Should I harvest capital losses to offset gains?

• Is now the time to make charitable gifts from pre-tax accounts?

• And is there a big one-time expense coming that I can plan across more than one tax year?

So, we’ve covered two big ideas for helping to manage your taxes in retirement today... understanding tax brackets... and timing your taxable income...

My third and final idea... is about which investment accounts to tap... when you start withdrawing from your savings...

Every investment account you have... is either taxable... tax-deferred... or tax-free...

Taxable accounts... non-IRAs... brokerage... joint accounts... savings accounts... money markets...

Tax-deferred accounts would be your traditional IRAs... 401-ks... annuities...

And tax-free accounts... Roth IRAs... Roth 401-ks... municipal bonds and so on...

Conventional thinking says... pull from taxable investments first... then the tax-deferred... and finally... if you have to... the tax-free money...

Again, that’s the rule of thumb... but it might not be the right strategy in your case...

When it comes to withdrawing money from your investments for spending each year... your tax advisor might recommend blending withdrawals from different buckets... to hit a target tax bracket...

Maybe it’s taxable withdrawals to cover basic expenses... then add enough IRA withdrawals to fill up your current tax bracket... and selectively use Roth IRA withdrawals when you want to avoid pushing income higher than you want...

Control and flexibility... that’s what your looking for in a retirement tax strategy...

There are three good ideas... let’s toss in a bonus strategy that we’re seeing more and more of our clients take advantage of...

If you are older than age 70-and-a-half... you can make charitable donations directly from your traditional IRA... money you would ordinarily have to pay taxes on... tax-free up to certain annual limits...

This can be a powerful way to soften the blow of those required minimum distributions... because these qualified charitable distributions... or QCDs... can be applied toward each year’s RMDs...

For tax year 2026... the annual limit for QCDs is $111,000... and that’s per person... as long as the distribution is to a qualified charitable organization...

If you take one thing away from this episode... let it be the idea that taxes in retirement are not a once-a-year event... they are a strategy...

A strategy... means looking beyond this year’s taxes... thinking ahead about what your income might be over the next several years... over the rest of your life... and controlling as much of it as you can along the way...

Talk with your tax advisor... think beyond this year’s return... and the long-term rewards might pay for that advice many times over...

Thanks for being with me today... and we’ll talk again soon...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

401(k) Plans: 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Roth 401(k) Plans: Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

RMDs: RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

IRAs: Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Roth IRA: Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Roth Conversions: Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Income from this bond is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, may be subject to the federal alternative minimum tax.