Important Tax Strategies During Retirement

Being proactive about your financial wellbeing is critical to safeguarding your assets during retirement. In addition, most financial decision during retirement has tax consequences—minimizing your tax liability is one of the best ways to ensure the protection of your hard-earned or hard-won wealth.

There are various tax strategies that you can employ when aiming to minimize your liability annually or long term. The experienced team at Ferguson Timar can help you take advantage of every tax minimization strategy that applies to your financial circumstances to keep more of your money in your accounts instead of handing it over for the government’s use. In this article, we’ll explore a few of the most powerful strategies that retirees can use when minimizing their tax liability.

Delay Social Security Income, if Possible

If you have enough income to get through early retirement without drawing Social Security, consider delaying receiving your benefits until you turn 70. Doing so takes full advantage of all possible credits designed to boost your benefits.

Drawing Social Security benefits starting on your 66th birthday will allow you to benefit from 100 percent of your full retirement benefits. You’ll benefit from 100.7 of your full retirement benefit by delaying your withdrawal by even a single month. By delaying withdrawal until you’ve reached the age of 70, you’ll receive 132 percent of your full retirement benefit. Combining this strategy with others (such as making tax-free income available later in your retirement via a backdoor Roth IRA) can help minimize or eliminate taxes on your Social Security income while maximizing the amount of Social Security income made available to you overall.

Explore the Benefits of a “Backdoor” Roth IRA Conversion

Although backdoor conversions may disappear in 2022 for individuals in higher tax brackets, if you qualify and are still earning income above the current limits for Roth IRA contributions, embrace the opportunity before it’s gone.

If your income exceeds Roth IRA investment limits, use the backdoor strategy to accumulate tax-free wealth after paying initial taxes. This is an excellent option for wage earners approaching retirement, as it allows for more earned money in a tax-free capacity.

The 2022 Roth IRA income limits are $214,000 for married individuals filing jointly and $144,000 for single filers. If your income exceeds these limits, you’ll take the following steps to create a backdoor Roth IRA:

  • Invest in a traditional IRA account
  • Convert this contribution to a Roth IRA
  • Pay income tax on the money converted to the Roth IRA so that the remainder of your contribution is available in a tax-free capacity later on

Invest Wisely

Investments serve different purposes at different phases of life. In retirement, consider whether your current investment strategies still serve your needs. For example, now might be a good time to consider investing in municipal bonds, as they usually insulate assets from significant tax liability and stock market volatility. Munis are an especially wise investment if you’re in a relatively high tax bracket.

It’s also time to review whether you hold your various securities in taxable or tax-deferred accounts. For example, assets such as growth or value stocks, low-turnover stock funds, and municipal bonds benefit from remaining in taxable accounts. By contrast, keep high-yield bonds, high-turnover stock mutual funds, and real estate investment trusts in tax-deferred accounts.

Finally, if you haven’t invested in tax-managed mutual funds, know that these might be worthy of consideration now that you’re a retiree. These funds are generally managed with a keen eye toward maintaining ultimate tax efficiency. Equity index funds, which usually have a lower investment turnover rate, tend to be especially tax-efficient when compared to actively managed stock funds.

Seek Personalized Tax Guidance Today

A proactive tax liability strategy is critically important to maintaining financial stability and to reaching your financial goals later in life.

The experienced team at Ferguson Timar can assist you with your financial retirement needs. Connect with us today to get started.