By Colleen Weber, CFP^®, CPA

Retirement is a time to relax, enjoy the fruits of your labor, and savor the freedom that comes with no longer punching the clock. However, it’s also a period that requires careful financial planning to enjoy a comfortable and worry-free future. 

One crucial aspect of retirement planning is finding strategies to save on taxes. By implementing smart tax-saving techniques, you can maximize your income, preserve your savings, and enhance your overall financial well-being during your golden years. Let’s delve into the importance of saving taxes in retirement and how it can positively impact your financial stability.

1. Limit Your Exposure to the 3.8% Medicare Surcharge Tax

There is a 3.8% Medicare surcharge tax that applies to net investment income for singles with a modified adjusted gross income (MAGI) of over $200,000 and couples with a MAGI over $250,000. The MAGI is adjusted gross income with some deductions added back in, such as tax-free foreign income, IRA contributions, and student loan interest. The surcharge tax is due on the smaller of net investment income (which includes interest, dividends, annuities, gains, passive income, and royalties) or the excess of MAGI over the thresholds. 

If your MAGI is near or above the thresholds, there are steps you can take to limit your exposure. First, you will want to review the tax efficiency of your investment holdings. It may be worthwhile to move less efficient investments into tax-deferred accounts and capitalize on tax-loss harvesting. Other moves you can make include investing in municipal bonds, which have tax-free interest, and taking capital losses to offset gains. Installment sales can spread out large gains and minimize your adjusted gross income, and real estate like-kind exchanges can also defer gains and their taxability.

2. Utilize Roth IRA Conversions

Distributions from Roth IRAs are tax-free, so they are a great tool to have in retirement. However, many people cannot contribute directly to a Roth IRA because of income limitations. Instead, you have to convert traditional IRA funds to a Roth account by paying the related income taxes. You can take advantage of low-income years, such as when you have stopped working but are not yet collecting Social Security, to convert your funds to a Roth IRA so you’ll have tax-free income later. It is important to be mindful of tax brackets when you do conversions so you don’t inadvertently push yourself into higher tax rates.

3. Take Advantage of the 0% Rate on Long-Term Capital Gains

If the Medicare surcharge tax is irrelevant to you because your income is lower, then you may be able to take advantage of the 0% long-term capital gains rate. Profits on the sales of assets owned over a year are tax-free if your income is below a certain threshold. Once you exceed those thresholds, long-term capital gains are taxed at 15% or up to 20% depending on your income during that tax year.

Claiming more deductions or making deductible IRA contributions can help keep your income within the 0% capital gains tax range while also providing their usual tax benefits. However, you will want to be strategic about taking tax-free gains as they can raise your adjusted gross income and affect the taxability of your Social Security benefits. Also, taking those gains may incur state tax liabilities as well.

4. Be Strategic About Inherited IRAs

At the beginning of the year, the laws surrounding IRAs inherited by non-spouses changed. You no longer have to take out a specific amount of money from the account each year, but you do have to empty the account within 10 years. If you fail to be strategic about withdrawals, you could be forced to empty the entire account at once with 10 years’ worth of growth. The problem with that is that it would greatly increase your taxable income for the year, pushing you into higher tax brackets and subjecting you to added taxes, like the Medicare surcharge tax. If you inherit an IRA from someone other than your spouse, you need to be strategic about your withdrawals and time them so as to limit your tax liability.

5. Donate Effectively

If you are charitably inclined, one of the best ways to save on taxes is through donations. You can get a tax deduction on donations up to 50% of your adjusted gross income. If you have appreciated assets, you can get an even greater tax break. When you donate an appreciated asset that you have owned for over a year, such as stocks, to a charity, you do not have to pay capital gains taxes on the appreciation, but you still get to claim the full value for your deduction. This allows you to avoid the capital gains tax altogether. If your assets have declined in value, it is best to sell them yourself and donate the proceeds so you can claim the loss when filing your taxes.

Another strategy to consider is the use of a charitable lead annuity trust or a donor-advised fund, which allow you to take an up-front write-off that can help offset other income, such as from a Roth IRA conversion or withdrawal from an inherited IRA. 

How We Can Help

As you embark on your retirement journey, it’s important to recognize the significance of implementing tax-saving strategies. By minimizing your tax burden, you can effectively stretch your retirement savings, increase your disposable income, and safeguard your financial future. 

However, navigating the complex world of tax laws and regulations can be daunting. Take charge of your retirement finances today by reaching out to a qualified financial advisor and tax professional to secure a prosperous and tax-efficient retirement. To learn more, book a free introductory meeting online or call (952) 470-0750.

About Colleen

Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.