Five Tax Moves To Think About Before December 31 For Retirees
Before December 31st, retirees should think about the following five items:
1. Conversions to Roth "in the valley"
The time between retiring and when your required minimum distributions (RMDs) and Social Security income streams start to rise again is known as the "valley." The sooner you retire and the longer you postpone receiving Social Security benefits, the more money you may live off of.
Basically, during the course of your working years, your salaries and any additional revenue from businesses will be the main contributors to your taxable income. Your taxable income decreases with retirement, which lowers your tax rates. It reappears when you start receiving retirement account distributions and switch on Social Security. And thus, "the valley."
You can transfer funds from pre-tax retirement accounts to Roth IRAs during this period, paying taxes at your current rate in the process. You should assess this method with an expert if you believe your present rate is lower than your prospective rate.
2. Accruing profits in capital
Had you been gifted with a crystal ball, you could have invested $1 million during the 2009 market's lowest point, closed your eyes, and woken up with nearly $6 million. Not many people have that kind of luck. It is reasonable to state, therefore, that the unrealized gains on your assets in taxable accounts will be greater the longer you have held onto them.
Similar to the previously mentioned tactic, you might be able to sell some of those wins tax-free during your retirement years if you have a tax valley. The majority of people are aware that there are many income tax bands. The majority of individuals are unaware that there are various capital gains tax brackets. Most people's federal capital gains tax will be 15%. On the other hand, you pay no capital gains taxes if you are in the 10% or 12% income tax rate. Once more, speak with your tax experts to determine the best course of action for you.
3. Examine Medicare eligibility limits
I work with a number of retired CPAs who, for whatever reason, can't stand receiving their IRMAA letters. The acronym for income-related monthly adjustment amount is IRMAA.
The premium is calculated using your two years' worth of gross (not taxable) income. Thus, we are considering 2025 premiums when we assess our clients' year-end planning. In contrast to typical insurance policies, you do not receive any more coverage if you choose to pay the maximum monthly premium of $560 as opposed to the lowest monthly cost of $165. Remaining below the adjustment thresholds is beneficial.
4. Fund retirement accounts and take RMDs
RMDs stand for necessary action. Contributions to retirement funds are within your control. It's ironic because, in the same year, you can both withdraw money from and deposit it into the same account. Depending on the year of your birth, the IRS requires minimum distributions from your pre-tax savings at specific ages.
To start, you have to make sure you take your RMD by December 31. There is an extension in your first year that lasts until April 1st of the subsequent year, although this is rarely advantageous in terms of taxes.
Contributions to retirement plans may still reduce your taxable income even if you are required to take required minimum distributions (RMDs). Ironically, this is a piece intended for retirees. The most common shape it takes is a post-retirement consultancy job. Let's take an example where you are 73 years old, have $1 million in retirement savings, and make $50,000 net from self-employment. You could fund a solo 401(k) and nearly completely offset your RMD.
5. Take into account QCDs or qualified charitable donations
All charitable contributions must be made by December 31. Because of this, donations on December 31st themselves exceed those made on Giving Tuesday, which falls on the Tuesday following Thanksgiving in the United States. If you are 70½ years of age or older, the typical guideline is to donate cash last, appreciated stock second, and IRA funds first. As with everything related to personal finance, your actions should be unique to you.
You can lower your gross income as well as your taxable income by making a direct gift from your IRA. Lowering your gross income may, as previously mentioned, result in a lower Medicare premium. Therefore, if you are only a little bit above a threshold, you could donate enough to drop back below it.
