Tax Savings Strategies for Retirement
Minimizing taxes during retirement is a critical component of managing your assets after you leave the workforce. Taking advantage of potential tax deductions can make your savings stretch further, allowing you to achieve more of your goals and live more comfortably during retirement. Whether you are currently retired or planning for your future retirement, the following tips can help your tax savings.
If you are still currently working, contributing to a Roth IRA could be one of the smartest retirement planning moves you can make. In order to contribute, you must have earned income below a certain amount (according to the IRS, a modified adjusted gross income of $193,000 if married and filing jointly).1 As long as you have earned income, you can contribute to these accounts after the age of 70 1/2, which is different from traditional IRAs. The best part about this type of account is that the funds you contribute grow tax-deferred and qualified distributions from Roth IRAs are tax-free. This can make a huge difference in your tax bill during retirement. It should be noted, however, that unlike traditional IRAs, you receive no tax deduction for contributing to this type of account, and the contribution limit for 2019 is currently $6,000 if you are under 50 and $7,000 if you are 50 years old or older.2
2. Donor-Advised Funds
Whether you are currently in retirement or you are still working, donor-advised funds can be a wonderful way to reduce your taxable income and maximize your tax savings. According to this article from Forbes[KB1] , donor-advised funds allow you to contribute a lump sum into this type of charitable giving vehicle, which makes it possible for you to receive a tax deduction in the year the contribution is made.3 However, you can spread out the actual donations to recipients over time. A very common way of doing this is to use appreciated stock with a low cost basis that you hold in a taxable account as your donation. For example, if you own $50,000 worth of a stock that has a cost basis of $20,000 in a brokerage account, you could contribute the stock to a donor advised fund, receive a $50,000 deduction for the charitable contribution, and avoid having to pay capital gains tax on the appreciated shares of stock. You can also choose to space out the contributions to the charities of your choice over time.
3. Qualified Charitable Distribution (QCD)
If you are 70 1/2 years old or older, the IRS requires that you must take a required minimum distribution (RMD) from certain types of IRAs and other retirement plans.4 One way to avoid having the amount of your RMD added to your taxable income for the year is to make a qualified charitable contribution directly from your IRA to a charity. This practice effectively eliminates the potential tax burden that would be caused by taking the RMD. It should be noted that the only way this works properly is if the check is sent directly to the organization from your IRA and NOT deposited into your checking account first.
Taking steps to minimize your tax bill in advance can help you stretch your retirement savings further so you can more fully enjoy your life after leaving the workforce. Talk to your tax adviser to discuss whether or not utilizing Roth IRAs, donor-advised funds, or QCDs as part of your tax strategy makes sense for your financial situation.