We were asked by Fiduciary News what our top tips were for saving on taxes in retirement. You can read their full article HERE. Below you'll find our top five tips.
1. Manage your Taxable Income
If you're not retired yet you should start by managing your taxable income. Project out the next 20 years what your yearly income will be. When your income is lower, like in retirement years, this may be a great time to recognize income even if you do not need “the funds”. For example, a low tax year may allow you to avoid capital gains on some part of your taxable investments, even if you do not need the funds at that moment. By recognizing a capital gain when a lower tax year happens you are preparing extraction of those funds in advance.
2. ROTH Conversations
Consider ROTH Conversions prior to 70.5yrs old to manage taxable income. By shuffling assets from a Traditional IRA to a ROTH IRA in a “low” tax year you are building up funds in an after tax account that could be used at anytime in the future. As more funds are built up in an after tax account you can balance on a yearly basis what amount of withdrawals comes from accounts that generate taxable income (Traditional IRA distributions, realized capital gains on taxable investment accounts) with those that do not generate taxable income (ROTH IRA distributions).
3. Use the "step-up basis"
For those with large unrealized table gains remember the “step-up basis” could be part of your approach. Upon death, the unrealized gain on taxable investment accounts disappear as assets are transferred to the next generation using the new basis at the time of death. If your investments are not needed immediately, but you plan on leaving these assets to your children or others, avoid selling these securities while you are living. Waiting for the step-up in tax basis will limit or avoid tax for many investors.
4. When to sell the losers
When recognizing capital gains you could sell losers at that same time to offset the capital gains and limit the taxable income.
5. Long v Short Term Capital Gains
Before taking capital gains, try to see if you could push out to “Long-term capital gains” which means the securities have been held for over one year. Short term capital gains occur when the securities are held less than one year. Thus, a short term capital gain will be taxed anywhere from 9-17% higher than long-term capital gains.