Maximize Your Retirement by Trimming Your Taxes – Let’s Get Creative!

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A wise person once said that “life begins at retirement.”  Whether you agree with that statement or not, I think we can all agree that retirement is certainly a very significant stage in our life.  Retirement not only means more time for family and travel, but it also means becoming accustomed to different tax laws and requirements.  That’s why it’s so important that, during the planning years before retirement and as you enter retirement, you do whatever you can to avoid unnecessary taxes on your retirement accounts.

The lawmakers force you to begin taking required minimum distributions (RMDs) at the age of 70½.  If you do not take RMDs as required, you face a 50% penalty.  To avoid paying large taxes on withdrawals from your 401(k)s, IRAs, or other tax-deferred retirement accounts, you need to start planning before the age of 70½.  We discuss here a few creative ways you can reduce your retiree taxes and maximize your retirement income.  Keep in mind, these strategies are all complex, and would require extensive analysis of your personal situation before moving forward.


Start taking withdrawals early.

The 10% early withdrawal penalty on tax-deferred retirement plans no longer applies once you turn 59½.  Instead, withdrawals are taxed as ordinary income and, after you retire, you might drop into a lower income tax bracket.  With early withdrawals, you could shrink the size of your tax-deferred accounts, which means lower RMDs when you turn 70½.

Convert funds.

If you convert a traditional IRA or 401(k) account to a Roth IRA, the original owner never has to take RMDs from the Roth.  You will still have to pay regular taxes on the funds you convert, so be cautious of that.  And keep in mind that a large conversion could put you in a higher tax bracket[1].


You could also invest up to 25% or $125,000 (whichever is less) of your IRA or 401(k) plan in a qualified longevity annuity contract (QLAC).  This is a deferred income annuity that is a guaranteed source of income when you reach a certain age[2].  Note that money invested in a QLAC does not count toward RMDs.

Give your payouts to charity.

This idea is for those of you who are already 70½ or older and are preparing for your 2016 giving.  Congress no longer waits to the end of the year to decide whether they will allow making direct contributions from an IRA to a charity.  The option is now permanent, which means you can transfer up to $100,000 annually to charity at any time.  These direct donations count toward your RMDs, but the distribution doesn’t count as taxable income.  As a result, the distribution doesn’t reduce the value of your itemized deductions or personal exemptions, and they can’t cause a surcharge in your Medicare premium.

Whether you are still well away from retirement, soon-approaching retirement, or already retired, you should always be considering how to minimize your taxes and planning accordingly.  If you have any questions about retirement or how you can save on taxes, please feel free to call our office.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  Information provided herein should not be construed as tax or legal advice. Please consult the appropriate professional to see how the laws apply to your situation.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC a Registered Investment Advisor. LPL Financial is under separate ownership from any other named entity.

[1] Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

[2] Guarantees are subject to contract terms, exclusions and limitations, and the claims-paying ability of the issuer. This contract is irrevocable, has no cash surrender value and no withdrawals are permitted prior to the income start date. Income payments are guaranteed at least as long as the annuitant is living, provided the annuitant is alive on the income start date chosen. Certain payout options will not provide a death benefit either prior to, or after, the designated income start date. Purchasing a QLAC solely for a tax decision may not be appropriate for everyone. Always consult an attorney or tax professional regarding your specific situation.

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