The end of the year is a crucial time for retirees to plan for their financial affairs, particularly in regard to taxes. A strategic approach to Roth conversions, Required Minimum Distributions (RMDs), capital gains, Medicare premiums, and charitable contributions can provide substantial financial benefits.
Here are five key strategies all retirees should consider implementing before Dec. 31.
#1 Optimize Roth Conversions During Low-Income Periods:
The period between the start of retirement benefits and the start of RMDs is known as the “retirement income gap” and should be taken advantage of by retired individuals. During this phase, income typically decreases, presenting an opportunity to convert funds from traditional retirement accounts to Roth IRAs at a lower tax rate. Talking with a financial advisor can help assess whether this strategy is beneficial based on your current and projected future tax rates.
#2 Strategically Realize Capital Gains:
Long-term investment holders in taxable accounts may have accumulated significant unrealized capital gains. The “retirement income gap” can provide an opportunity to realize some of these gains while potentially qualifying for the 0% federal capital gains tax rate, applicable to those in the 10% or 12% income tax brackets. Consulting with tax professionals to determine the viability of this strategy is recommended.
#3 Navigate Medicare Premium Thresholds:
Medicare Part B premiums are influenced by one’s income, with higher incomes resulting in increased premiums. Unlike most insurance policies, if you pay higher premiums, you don’t get any more insurance. Since these premiums are based on gross income from two years prior, retirees should plan strategically to stay below the income thresholds that trigger higher premiums. This can result in substantial savings on healthcare costs.
#4 Manage RMDs and Retirement Account Contributions:
Retirees are required to take RMDs from their pre-tax retirement accounts starting at a specific age, which varies based on birth year. Ensuring timely RMD withdrawals is essential to avoid penalties. Retirees with self-employment income may reduce taxable income by contributing to retirement accounts like a solo 401(k) and offsetting RMDs.
#5 Leverage Qualified Charitable Distributions (QCDs):
The deadline for all charitable giving is Dec. 31. This is why more money is donated on Dec. 31 itself than any other day. Charitable giving is a valuable strategy for reducing taxable income, and QCDs allow individuals aged 70½ or older to donate directly from their IRAs to qualified charities. This not only reduces gross income, potentially lowering Medicare premiums, but also fulfills charitable intentions. Prioritizing donations from IRAs, followed by appreciated stock and cash, is a general guideline.
Engaging in strategic tax planning before the end of the year can lead to significant financial benefits for retirees. By optimizing Roth conversions, realizing capital gains, managing Medicare premiums, taking RMDs, contributing to retirement accounts, and making qualified charitable distributions, retirees can enhance their financial well-being and enter the new year with a solid financial foundation. Consulting with financial and tax professionals to tailor these strategies to individual circumstances is highly recommended.