6 tax strategies your clients can use in retirement

Saving for retirement using tax-deferred strategies like defined contribution plans in Individual Retirement Accounts (IRAs) helps reduce a client’s current tax burden while they are in the workforce. This strategy can help increase savings while delaying taxes, but presents a future risk in retirement when taxes need to be paid. One concern is that a client’s tax rate may be higher in the future than it is today.

To help address that risk, a client may want to perform a Roth conversion to pay taxes on those assets now. That way, there are funds available for retirement that don’t add to taxable income.

Clients who want to donate to charity can use giving strategies to help reduce their tax burden and preserve wealth.

A Qualified Charitable Distribution (QCD) can be used by those over age 70½ for charitable gifting. This type of IRA withdrawal will not increase a client’s adjusted gross income and associated taxes.

Health Savings Accounts (HSAs) are tax-advantaged savings accounts designed to help those who have high-deductible health plans pay for out-of-pocket medical expenses. Clients who have access to an HSA may want to consider building a future income-tax-free source of funds for eligible medical expenses in retirement.

HSAs offer three main tax benefits: pre-tax contributions, income-tax-free earnings potential, and income-tax-free distribution when funds are used for qualified medical expenses.

Beneficiaries of a defined contribution plan or traditional IRA are generally required to liquidate the assets by the end of the 10^th calendar year following the owner’s death. Prior to the SECURE Act of 2019, many beneficiaries could “stretch” out their withdrawals, but now there are a limited number of exceptions.

Still, there are some alternative ways to try to manage the tax burden. One way is to split the beneficiaries. If retirement plan owners think money will ultimately end up with one of their children, they may want to consider leaving a portion of the plan directly to the child in a separate account rather than with the surviving spouse. This would give the beneficiary a 10-year window for withdrawals after the first death and a 10-year window after the second.

When preparing retirement income plans for a married couple, it can be easy to assume that they will always be taxed as a married couple. After a spouse's death, if the survivor files as a single taxpayer, the tax increase can be substantial. Over time, the increased tax rate could deplete assets faster than anticipated and reduce the available income.

A couple can purchase an annuity in order to provide lifetime income regardless of death order or income tax situation. The annuity can offer a stable and growing retirement income source to address the risk associated with a change in tax status.

If an employee has employer stock held within their employer-sponsored retirement plan, they may be able to convert a portion of it from ordinary income to capital gains income. This is beneficial since long-term capital gains tax rates are typically lower than ordinary income rates.