Being Tax Savvy Doesn’t Stop at Retirement

Doug Ewing discusses three tips for those of retirement age regarding financial planning in a blog for Nationwide. In it, he discusses that one of the most important and straightforward tips for keeping a keen eye on what is owed the IRS come filing season is to track taxable income throughout the year. Doing this in tandem with a knowledge of the current tax brackets will ensure that you don’t unwittingly bump up into the next tax bracket at the tail end of the year.

Ewing gives the example of an individual who is on the threshold of the next taxable income bracket at the end of the year and recommends that in that case, it would be more financially prudent to pull money from a Roth account, life insurance policies that might have cash value, or a savings account, as they are all distributions that generally are not taxable. Depending on the circumstance, a long-term capital gain at 15% might be more strategic financially than bumping up from a 12% tax bracket to a 22% one.

For those that qualify, married filing jointly offers a lot more leeway in tax rates than filing single; married couples enjoy a bigger standard deduction with a larger spread on tax brackets. The current taxable income threshold for married filers at 12% before increasing to 22% is $81,050; for single filers, it is $40,525.

It seems like there is a lot of leeway for a single filer, but if a spouse dies and their retirement assets go to the surviving spouse, between required minimum distributions (RMDs) of the accounts, the single filer could be easily catapulted into the next tax bracket. One way to avoid this is to convert to Roth accounts, which could reduce RMDs and bring down the balances in tax-deferred accounts to ensure that they stay within the 12% thresholds for filing purposes, all while increasing tax-free savings. Roth accounts can serve a dual purpose in case of death by being both a source of tax-free income for the surviving spouse and a tax-free inheritance for beneficiaries.

When considering how to disperse inheritance to beneficiaries, taking into account the tax situation of whoever would be inheriting is an important consideration. For those already in higher tax brackets, leaving more tax-efficient options to them makes more sense financially than saddling them with tax-deferred accounts that would be taxed heavily. For those in lower tax brackets, its easier to leave these kinds of accounts too, as they will have a wider window for income tax brackets on the distributions.

For more news, information, and strategy, visit the Retirement Income Channel.