Taxes are a critical expense category in retirement and the clock is ticking on making timely, tax-saving moves before year-end. If you’re retired, now is a good time to take a closer look at your investment portfolio and determine if any changes are appropriate.
Keep in mind that some changes may need to be implemented by December 31, 2023 to avoid negative tax implications – which is all the more reason to get started today.
Here are five steps to consider:
#1 – Actively manage retirement plan distributions
All distributions from workplace retirement plans made with pre-tax contributions are subject to tax at your ordinary income tax rate. For IRAs funded with after-tax contributions or annuities, the portion of the distribution attributable to earnings growth inside those accounts is subject to tax. You want to balance distributions from pre-tax and after-tax accounts to avoid moving into a higher tax bracket (if possible), which would increase your tax liability. Utilizing tax-free Roth IRA distributions to fulfill your cash flow needs is one way to help manage your tax burden.
#2 – Be aware of RMD rules
If you turn 73 in 2023, you have to begin taking required minimum distributions (RMDs) from traditional IRAs or workplace retirement plans with the first RMD due by April 1, 2024. Beginning in the 2024 tax year, RMDs must be taken by December 31. That means if you wait and take your first RMD in 2024 before April 1, you will have two RMDs in 2024. To check when RMDs start for you (based on your birth year), visit IRS.gov.
#3 – Make tax-smart charitable gifts
If, like most people, you don’t itemize tax deductions and claim a standard deduction on your tax return, you can make charitable contributions and generate tax savings using other strategies. If you are age 70½ or older, you can arrange qualified charitable distributions (QCD) from your IRA, which go directly from the IRA custodian to the qualified charitable organization. This approach is beneficial if you must take RMDs and don’t need the money for your own needs because you can avoid claiming the RMD as taxable income by directing the QCD to a qualified charitable organization. Individuals can direct up to $100,000 in gifts to qualified charities from their IRAs annually (that number will be indexed to inflation beginning in 2024). Another option is to gift appreciated assets, such as stock, to a charitable organization. By gifting the asset, you avoid realizing the capital gain that would result from selling it. Your tax burden can be reduced while supporting a favored cause.
#4 – Consider tax harvesting
If you do not yet collect Social Security (you have until age 70 to begin) and are not yet age 73 (to begin RMDs), it might be time to tap some investment gains in your portfolio. Realizing gains by selling appreciated assets (in taxable accounts) will add to your tax burden this year, but can help lower your tax liability in future years when other sources of income kick in. You can also look for opportunities to sell positions at a loss and offset some of your capital gains.
#5 – Manage your Medicare premiums
Along with managing your tax burden, strategically maneuvering income streams can help you stay below thresholds that could result in higher premiums for Medicare Part B. Single people with income over $97,000 and married couples with incomes exceeding $194,000 (2023 levels) might have to pay higher Medicare Part B premiums in 2025 as a result. If you can keep income below those levels, you may maintain the most favorable Part B premium. Even if your income is higher, there are multiple premium tiers based on income level, so any steps you can take to limit your income in a given year may help reduce your premium.
If you are seeking to implement these or other significant tax-saving strategies, be sure to check with your financial and tax advisors for confirmation that the measures you are implementing are appropriate for you.
Edward Pontarelli Jr, APMA®, CRPC® is a Financial Advisor and Managing Director with BeaconPoint Wealth Advisors a financial advisory practice of Ameriprise Financial Services, Inc. in Providence, RI. He specializes in fee based financial planning and asset management strategies and has been in practice for 23 years. Please contact him at https://www.ameripriseadvisors.com/team/beacon-point-wealth-advisors or (401)824-2532, 1 Citizens Plaza Ste 610 Providence, RI 02903.
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