5 Tax-Efficient Retirement Strategies

By Becky Meats, CPA/PFS™

What do you envision when you think about retirement or dream about your next stage of life? I bet taxes have nothing to do with it! Typically, people only start thinking about taxes around February, and once their returns are filed a month or two later, they tend to forget about them entirely. But if you hope to reduce your tax burden, it’s essential to keep taxes in mind all year round. This is particularly important during retirement—when instead of adding to your accounts, you’re drawing from them. 

So, let’s explore five tax-efficient retirement strategies to help you pursue your ideal future.

1. Limit Your Exposure to the 3.8% Medicare Surcharge Tax

There is a 3.8% Medicare surcharge tax that applies to net investment income for single filers with a modified adjusted gross income (MAGI) of over $200,000 and couples with a MAGI over $250,000. The MAGI is adjusted gross income with some deductions added back in, such as tax-free foreign income, IRA contributions, and student loan interest. The surcharge tax is due on the smaller of net investment income (which includes interest, dividends, annuities, gains, passive income, and royalties) or the excess of MAGI over the thresholds. 

Is your MAGI near or above the thresholds? There are steps you can take to limit your exposure. First, review the tax efficiency of your investment holdings. It may be worthwhile to move less efficient investments into tax-deferred accounts and capitalize on tax-loss harvesting. Other moves you can make include investing in municipal bonds, which have tax-free interest, and taking capital losses to offset gains. Installment sales can spread out large gains and minimize your adjusted gross income, and real estate like-kind exchanges can also defer gains and their taxability.

2. Utilize Roth IRA Conversions

Distributions from Roth IRAs are tax-free, which makes them a great tool to have in retirement! Because many people cannot contribute directly to a Roth IRA due to income limitations, you instead have to convert traditional IRA funds to a Roth account by paying the related income taxes. You can take advantage of low-income years, such as when you have stopped working but are not yet collecting Social Security, to convert your funds to a Roth IRA so you’ll have tax-free income later. But keep tax brackets in mind when you complete the conversions so you don’t inadvertently push yourself into higher tax rates!

3. Take Advantage of the 0% Rate on Long-Term Capital Gains

Is the Medicare surcharge tax irrelevant to you because your income is lower? Then you may be able to take advantage of the 0% long-term capital gains rate. Profits on the sales of assets owned over a year are tax-free if your 2024 taxable income is below $47,025 for single filers or $94,050 for married couples filing jointly. Once you exceed those thresholds, long-term capital gains are taxed at 15% until your 2024 taxable income is above $518,900 for single filers or $583,750 for couples, at which point the tax rate  is 20%.

Claiming more deductions or making deductible IRA contributions can help keep your taxable income within the 0% capital gains tax range while also providing their usual tax benefits. But be strategic about taking tax-free gains since they can raise your adjusted gross income and affect the taxability of your Social Security benefits. Don’t forget that taking those gains could incur state tax liabilities as well.

4. Be Strategic About Inherited IRAs

At the beginning of 2020, the laws surrounding IRAs inherited by non-spouses changed. You no longer have to take a required distribution each year, but you do have to empty the account within 10 years. If you’re not strategic about withdrawals, you could be pushed into higher tax brackets and ultimately pay more in taxes than you otherwise would have paid. What’s the problem? This move could subject you to additional taxes or a loss of tax credits. If you inherit an IRA from someone other than your spouse, you must be strategic about your withdrawals and time them so you can limit your tax liability.

5. Donate Effectively

Are you charitably inclined? One of the best ways to save on taxes is through donations. You may be able to get a tax deduction on donations up to 60% of your adjusted gross income. If you have appreciated assets, the tax break could be even greater. When you donate an appreciated asset that you have owned for over a year, such as stocks, to a charity, you don’t have to pay capital gains taxes on the appreciation, but you still get to claim the full value for your deduction. This allows you to avoid the capital gains tax altogether. If your assets have declined in value, it’s best to sell them yourself and donate the proceeds so you can claim the loss when filing your taxes.

Other strategies to consider are the use of donor-advised funds and qualified charitable distributions (QCDs). These allow you to take a deduction that can help offset other income, such as from a Roth IRA conversion or withdrawal from an inherited IRA. 

We’re Here to Help

Yes, taxes are an unavoidable part of life. But it is possible to reduce your tax burden in retirement. And, yes, implementing tax-related strategies involves many factors that need careful consideration to optimize them effectively. But the good news? You don’t have to handle this process by yourself! If you’re ready to utilize these tax-efficient retirement strategies, we highly recommend collaborating with a seasoned professional who can guide you through the details so you can feel confident in your retirement plan.

If you don’t already have a trusted financial partner, I’d be happy to chat with you and demonstrate how our team at Clear Insight Wealth Management can help. Take the first step toward your dream life by scheduling a get-acquainted meeting through our website https://www.myciwm.com/contact or emailing me at becky@myciwm.com. I look forward to talking with you!

About Becky

Becky Meats is a Certified Public Accountant and partner at Clear Insight Wealth Management, a wealth management firm for military families, government employees, and small business owners looking for a clear path to living their best lives. A firm believer that money is a tool that allows us to make our dreams happen, Becky thrives off simplifying clients’ finances and helping them find financial success. Becky has the rare talent of making the seemingly complex and chaotic world of finances and taxes simple and understandable. This understanding allows clients to make better use of their financial tools, often leading to success in many other parts of their lives.

Becky obtained her bachelor’s degree from Washington State University and has over 16 years of experience in accounting. She is a Certified Public Accountant (CPA) and Personal Financial Specialist (PFS). Her expertise is critical in integrating all the aspects of financial planning into a comprehensive whole.

Becky and her family live on a small farm with their registered Jersey cows and flock of unruly chickens. When she’s not poring over tax code, she can be found chasing cows out of her garden or lacing up her running shoes and going for a training run. An avid runner, she’s working toward the goal of running a race in every state (4 down, 46 to go). Despite a busy schedule, Becky dedicates her time to the local community. She is active in her local grange and corrals the Junior and Youth grangers at the local county fair (a significantly more difficult challenge than the livestock). To learn more about Becky, connect with her on LinkedIn.