Don’t Forget RMDs and 7 More Year End Tax Tips for Retirees

year end tax advice for retirement
Below are key end of year tax strategies to help you keep more money.

YEAR END TAX ADVICE #1: Over 72? Don’t Overlook Required Minimum Distributions (RMDs)!

This is perhaps the easiest piece of year end tax advice for retirees: Don’t forget to take your RMDs!

However, Fidelity Investments reports that the majority — 61% — of their account holders who are older than 70 1/2 have not yet taken their Required Minimum Distributions (RMDs).

What?!?  Get to it!

What is an RMD? If you’re 70 1/2 or older and have a traditional IRA or 401k, the IRS requires you to take a certain minimum amount from your account each year – and if you don’t take enough, you’ll be slapped with a huge tax penalty.

The good news: If you have tax-deferred retirement savings, you received a handsome tax break. The money you contributed to those accounts was deducted from your taxable income.

The bad news: When you take money out of your tax-deferred IRA or 401(k), you have to pay taxes on those distributions.

How to Calculate Your RMD:  The NewRetirement Retirement Planner automatically accounts for RMDs for all of your wealth projections.  Starting at age 70.5, the calculator estimates required minimum distributions based on IRS Publication 590-B.

However, you should always double check these calculations. The IRS provides two worksheets to help you calculate your required minimum distributions. Most retirees will use the default RMD worksheet; if your spouse is the sole beneficiary on your IRA and he or she is more than 10 years younger than you are, use this RMD worksheet instead.

You’ll need to know the balances on all your traditional IRAs as of December 31 of the previous year. You can find this information on your IRA provider’s end of year statement; if you no longer have that document, call the IRA provider and ask for another copy.

Note that you shouldn’t include the balances for any Roth IRAs in this total; Roth IRA accounts are exempt from RMDs.

NB: Roth 401k accounts that haven’t been rolled over to a Roth IRA are not exempt — if you have a Roth 401k with a former employer and you’re over 70.5, you may want to convert it to a Roth IRA to avoid RMDs on these holdings.

YEAR END TAX ADVICE #2: Reduce Taxable Income

Taking Required Minimum Distributions can be problematic for taxes if it pushes your taxable income into a higher tax bracket.

However, even if you are not taking RMD, you still need to worry about keeping your income below certain thresholds!

The most basic and powerful way to cut your taxes is to cut your taxable income. You can do so in a number of ways: find sources of nontaxable income, use deductions to remove income from your taxable total, grab any tax credits you qualify for, and so on.

Here are a few specific examples.

Do a Roth Conversion

By transferring some of the money from your traditional IRA into a Roth IRA, you not only turn the money you moved into nontaxable income in retirement, it also helps to reduce your RMDs by lowering the balances in your traditional IRAs.

However, there’s one big catch: when you do a Roth conversion, you have to pay taxes that year on the money you moved to the Roth account. If you have a huge balance to convert, you may not be able to afford to do it all in a single year.

On the other hand, splitting the conversion out over five or ten years would reduce your annual and total tax bill for the converted money.

TRY IT OUT: Are you curious about how a Roth Conversion will impact your finances? You can model a Roth Conversion in the Retirement Planner. Log in and go to the “Savings and Assets” page in My Plan.

  • Simulate the conversion
  • Then, look closely at your tax estimates, cash flow and net worth at different points of time to assess whether this might be a good move for you or not

Try Tax Loss Harvesting

If you sell investments that aren’t tucked away in a tax-advantaged retirement account, you’ll have to pay capital gains taxes on the profits you made from those investments. However, if you sold any investments at a loss during the same year, you can wipe out those gains for tax purposes and avoid paying the related taxes.

This approach is known as tax loss harvesting.

Tax loss harvesting allows you to get rid of your loser investments while profiting a little from the transaction. In fact, if you have more losses than gains, you can use the extra losses to erase up to $3,000 of other taxable income (including the distributions from your traditional IRAs).

Consider Bundling Medical and Charitable Deductions into Certain Years

Because the threshold for deductions on medical expenses and charitable donations is higher, you may want to consider bundling those expenses into certain years and only claiming them every two or three years.

For example:

Max Out Medical Expenses: By grouping as many medical expenses as possible in a single year, you can maximize the deduction you get for those expenses. In 2019 you can only deduct expenses which exceed 7.5% of your adjusted gross income.

If you’ve already had some significant healthcare expenses for the year, see if you can move medical expenses that you’d normally take next year to the end of this one. For example, if you have a dentist appointment in January, move it to mid-December instead.

Long Term Care Insurance: If you recently purchased long term care insurance, you may be able to deduct the premiums.  The older you are, the more you can deduct. In 2020, the deductions range from $430 to $5,430.

Charitable Donations: Instead of making annual charitable gifts, give 2, 3, or even 5 years’ worth of donations in a single year, then take a few years off.

Focusing all of your donations in a single year increases the value of deductions beyond threshold for a single year, and then take the larger standard deduction in the “skip” years.

A Donar-Advised Fund (DAF) may be an option if you are bundling charitable expenses.  Per Fidelity, “A DAF may allow for tax-deductible contributions of cash or appreciated assets in a given year, but then control the timing of the distributions to charity in future years.”  This is probably a strategy you will want to discuss with a financial advisor.

Still Working? Max Out Your Tax Advantaged Savings!

The 2019 contribution limits are:

  • $19,000 for 401ks, 403bs, 457s as well as Thrift Savings Plans. And, if you are 50 or older, the catch-up contribution is an additional $6,000. So, you can save a total of $25,000!
  • $6,000 for IRAs. And, the catch-up contribution for people 50 or older is $1,000. So, you can save up to $7,000 with tax advantages.

And, remember that you can max out both kinds of savings vehicles — and throw in a Roth account too!

Also if You Are Still Working, Defer Income

Depending on your future work prospects, you may want to push some of your income — like a bonus — out till next year.

The Retirement Planner gives you insight into future income and tax brackets and can probably help you make this decision.

YEAR END TAX ADVICE #3: Pay Attention to the Medicare Surtax for High Earners

According to MorningStar, “As in years past, an additional 3.8% Medicare surtax will apply to the lesser of net investment income or the excess of modified adjusted gross income over $200,000 for single taxpayers and $250,000 for married couples filing jointly.”

So, it may be worth keeping your income levels below these thresholds. The NewRetirement Planner factors in these additional costs, when applicable.

#4: 65 or Older? Know that You Have a Higher Standard Deduction

If you take the standard deduction instead of itemizing, your standard deduction is $1,300 higher if you are over 65. (The Planner factors this into federal income tax estimates)

For the 2019 tax year, the standard deduction for those 65 and older is $12,200 for singles, $24,400 if married and filing jointly, $12,200 if married and filing separately and $18,350 for head of household.

#5: Know How Your Social Security Benefits Are Taxed

Social Security benefits are taxed only if your income exceeds a certain threshold.

Federal Taxes: Income for federal taxes is defined as half your Social Security benefits, plus all other taxable income and some nontaxable income including municipal bond interest.

State Taxes: You also need to know your state’s rules on taxing Social Security benefits if you live in one of the 13 states that do.

Let NewRetirement show you your projected tax burden for this year and evermore.

#6: Thinking of Relocating in 2020? Consider the Best States to Retire in for Taxes!

Most of the wisdom shared above is most relevant to federal taxes.  However, state taxes can take a big bite out of your retirement nest egg as well.

If you are considering relocating for retirement, you might as well look at states that have the most favorable tax rates for retirees.  These 10 locations are the best states to retire in for taxes.

#7: 529 Plans

529 plans provide federal tax-free growth and tax-free withdrawals for education expenses.  Additionally, there may be state tax credits or deductions for your contributions to these plans.

However, consider carefully about when to tap this resource.  Allowing the money to grow in the tax-deferred account produces greater tax savings rather than withdrawing it now.

#8: Consider Getting Professional Help

When you’ve got a lot of financial balls in the air, your tax return can get remarkably complicated. This is especially true if it’s the first year you’re taking a required minimum distribution. In that case, strongly consider getting a tax pro (a CPA or enrolled agent, not an uncertified tax preparer) to do your return for you.

Not only will you know that you’re getting every possible tax break, but you can even deduct the tax preparation fees from your next year’s return!

A certified financial advisor is another great resource for year end tax advice!  Look for one that specializes in retirement planningNewRetirement Advisors are a low cost option that uses the power of technology to deliver better advice.

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