Skip to main content

Site Navigation

Site Search

global Tax

Tax Minimization Strategies for Retirees

June 29, 2021

Nearing retirement? We have some tips to ensure that tax burden during retirement is manageable.

Retirees…wondering how you can minimize your tax burden during retirement? Today’s retirees face different obstacles—how can you effectively address those challenges? We explore below.

How is retirement different now?

Previous generations could mainly rely on Social Security benefits and pensions during retirement but nowadays retirements are largely funded through pre-tax retirement accounts like 401(k)s and deductible IRAs. This is not always advantageous as all withdrawals from these accounts in retirement are taxable as ordinary income (at the current tax rates in the U.S.) So, if tax rates rise, you will have less after-tax income in retirement. Given that Biden's American Jobs Plan (AJP) could increase tax rates, retirees need to plan now.

What could the AJP change?

While legislation is far from final, the AJP could include the following changes:

  • Potential elimination of the favorable long-term capital gains tax rates for high net worth individuals—those with incomes of $1 million or more could be paying up to 39.6% on their gains, up from the current rate of 20%.
  • Lower standard deduction—A lot of retirees rely on the standard deduction rather than itemizing so taxes could increase if the current standard deduction is lowered.
  • Federal estate tax exemption amount could be lowered, which will impact estates valued above $3.5 million.
  • Social security payroll tax could be extended to apply to workers or households earning over $400,000 annually. Employers and employees each pay 6.2% and self employed pay the full 12.4%.

Planning strategies for retirees

The looming tax changes present several planning opportunities for those nearing retirement.

Consider converting part or all of your traditional 401(k) or IRA to a Roth IRA. You pay tax on the converted amount and eventually withdraw it from the Roth tax-free. A Roth conversion at the current rates could be a good planning opportunity for those who don’t expect their tax burden to decrease dramatically in retirement.

A Roth is also exempt from required minimum distributions (RMDs) so the money can continue to grow tax-free throughout the owner’s lifetime. Distributions from Roths are not taxable unlike traditional IRAs and, as long as the account is at least five years old, will not incur an early withdrawal penalty.

Another possibility is creating a charitable remainder trust. These irrevocable trusts are designed to benefit charitable organizations. But they also continue to provide the donor (or the donor and another beneficiary) with an income stream for life (or a term up to 20 years) plus some significant tax breaks.

To explore the full range of retirement tax saving options, talk to a member of our private client services team. We can help you devise a plan that suits your personal financial needs.

Questions? Contact us.

Stay informed. Get all the latest news delivered straight to your inbox.

Also in Tax Blog

up arrow Scroll to Top