Tax Planning Strategies for Retirees: Minimizing Your Tax Burden

Written by Canty Financial - Published on February 23, 2024

Tax planning is a cornerstone of a solid retirement plan, ensuring you can enjoy retirement while maximizing the savings accumulated throughout your career. Understanding how different income sources are taxed, and leveraging strategies to minimize these taxes is critical. Additionally, the guidance of a trusted financial advisor who knows your situation, understands the complex tax landscape, and acts as a sounding board for your ideas and questions is indispensable. 

Understanding Your Retirement Income Sources

Retirement income has unique tax implications, depending on the account type or investment:

  • Taxable Income: Includes earnings from brokerage accounts, taxed as either long-term or short-term capital gains. Dividends and interest are taxed at ordinary income tax rates and/ or capital gains rates.
  • Tax-Deferred: Traditional IRAs, 401(k)s, 403(b), TSP, Deferred Comp, Pensions, and annuities fall under this category, with taxes applied at ordinary income rates upon withdrawal.
  • Tax-Free: Roth IRAs and Roth 401(k)s offer qualified distributions that are tax-free, providing a significant advantage in retirement planning. Certain types of bonds can also offer tax-free income.
  • Social Security: Social Security is taxed as ordinary income. Between 0%, 50%, or 85% of the benefits received will be considered taxable, depending on your total income.

Utilizing Tax-Efficient Withdrawal Strategies

The strategy you use to withdraw from your retirement savings plays a crucial role in managing your tax impact. Typically, prioritizing withdrawals from taxable investment accounts first, to take advantage of potentially lower capital gains rates, is advisable.

Then, accessing funds from tax-deferred accounts like 401(k)s and traditional IRAs can help, as these are taxed as ordinary income upon withdrawal.

Integrating Roth IRAs into your strategy adds valuable tax diversification and flexibility, given that qualified distributions are tax-free.

Understanding the nuances of Required Minimum Distributions (RMDs) and selecting the appropriate investments to liquidate are also essential for minimizing tax liabilities. At Canty Financial, we emphasize tax-efficient withdrawal planning as a vital part of our retirement planning services, aiming to enhance your financial outcome in retirement.

Investing in Tax-Advantaged Accounts and Portfolio Structures

Considering tax implications prior to making investments can lead to substantial tax savings and provide increased after-tax returns. The choice between investing in traditional IRAs versus Roth IRAs, for example, should be influenced by your current and expected future tax situations.

Contributions to Health Savings Accounts (HSAs), if eligible, also offer tax benefits and can act as a substitute for your IRA or other tax-deferred accounts. Contributions to HSAs are tax deductible and if used for qualified medical expenses distributions are tax-free. Any distributions from HSAs after age 65 are considered ordinary income, but not subject to a 10% penalty.

Exchange traded funds are more tax efficient and have less capital gain distributions compared to similar mutual funds, allowing you to keep your money invested rather than having to pay large tax bills each year. We construct portfolios of ETFs at Canty Financial, giving our clients more tax-advantageous portfolio structures.

Harvesting Losses and Gains

Tax-loss harvesting is a strategy to offset capital gains with losses reducing your net tax burden. At Canty Financial, we leverage our portfolio rebalancing software, 55IP, to automate this process. Tax loss harvesting opportunities are consistently analyzed every 30 days, allowing our clients to take advantage of fluctuations in the market. If a fund can be sold at a loss, we will realize the loss by selling that ETF and then purchasing a very similar fund. This allows our clients to take advantage of the loss while remaining fully invested at all times. This approach is particularly beneficial for managing large, unrealized gains and for transitioning accounts to a new portfolio with minimal tax impact.

Charitable Contributions

Charitable giving, including Qualified Charitable Distributions (QCDs) from IRAs, can reduce taxable income and is highly effective if you are subject to RMDs or if you take the standard deduction. Donating appreciated assets directly to charity can also circumvent capital gains taxes, offering a tax-efficient way to support charitable causes.

Estate Planning and Gifting

We assist clients in developing estate planning strategies that minimize transfer taxes and facilitate the efficient transfer of wealth to heirs. This may involve the use of trusts, beneficiary designations, transfer on death titling, and strategic gifting. Understanding the rules and benefits of annual gifting can further reduce tax bills.

State Tax Considerations

State taxes can also affect retirement income. For instance, New York State does not tax Social Security or public pensions and offers a $20,000 exclusion for retirement account withdrawals.

Certain income such as interest from U.S. government bonds are also tax-exempt in many States.

Planning for State taxes, especially if considering a move in retirement, is crucial for minimizing overall tax burdens.

Consult with a Professional

Tailoring tax planning strategies to individual circumstances requires professional insight. The landscape of tax laws and personal situations is ever-changing, highlighting the need for ongoing tax planning.

At Canty Financial, we prioritize the integration of tax considerations into your comprehensive financial plan, covering areas such as retirement, estate planning, and investment management. Our approach ensures that our clients experience no gap between their tax strategy and their broader financial decisions, a common issue when advisors lack sufficient tax knowledge.

Engaging with a financial planner or tax professional goes beyond mere tax compliance, it's about maximizing your financial potential in retirement. By understanding and applying these strategies, retirees can significantly reduce their tax burdens, securing a more prosperous and worry-free retirement.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, CFP®, Financial Planner

Tina Alteri, CPA, Tax Advisor

Maureen Walsh, EA, Tax Advisor

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