Life After Retirement: Tax Planning

Trent Bradshaw CFP®, AIF® & Brandon Rogers CFP®, AIF® |

Today, something is going on that you might not know about and, worse, might not know how to stop. The situation? Consumers are seeing an erosion of their retirement savings, their buying power, and their quality of retirement life. The culprit? Lack of proper tax planning.

Knowing how the money you've earned and saved will be taxed during your retirement years could be the defining factor in your life after retirement. Your income sources, the amount of income you receive annually, and your filing status will all determine how much money you truly have to live on. Unless your taxable income falls at or below the standard deduction level every year, you'll probably pay taxes. How much you'll pay is another story.

Distributions from qualified retirement plans might be another taxable bucket, eroding your retirement savings. 401(k)s, IRAs, pensions, and other savings plans that were funded with "before tax" monies are subject to tax on the investment plus the earned income at a potential rate of 10-37%. Capital gains are another area that could be subject to taxes, so plan your investment sales accordingly. It's important to note that you could find yourself in a higher tax bracket due to the annual required minimum distribution (RMD).

Because older people often have several types of taxable income, both earned and unearned, their tax rate and liability depend on the tax bracket that corresponds to their total taxable income. Determine your tax bracket in retirement the same way you did while you were working—add up your sources of taxable income, subtract your standard or itemized deductions, apply any tax credits you're eligible for, and check the tax tables in the instructions of Form 1040 and 1040 SR.


So if we all have to pay taxes, what's the strategy for paying less?


Let's start with the standard deductions to lower your taxable income and your overall tax bill. The standard deduction for 2021 is $12,550 for single taxpayers and married taxpayers filing separately $25,100 for married taxpayers filing jointly, and $18,800 for heads of household. There's also a senior add-on bonus of $1,700 if unmarried and without a surviving spouse or $1,350 per person if you're married.

If you're still able to make retirement contributions to a Roth IRA or Roth 401(k), these are done on an after-tax basis. While there isn't an upfront tax break, the benefits during retirement are significant: withdrawals are tax-free, no required minimum distribution, and penalty-free withdrawals. There are limits. You can contribute a maximum of $7,000 if you're over 50 and make less than $198,000. The pretax money in traditional IRAs and 401(k)s grows tax-free, but you'll eventually pay taxes when you start making withdrawals in retirement. Under new rules that kicked in during 2020, you can wait until the year in which you reach age 72 before having to start taking RMDs. Previously, the age was 70½. If you don't need the RMD, consider donating it to charity. If you donate your RMD to a qualified charity directly from your retirement account, up to $100,000, you won't owe income tax on the distribution.

Further, if you choose to make a charitable donation to a 501(c)(3) in the form of cash, securities, or other assets, it'll only reduce your tax bill if you itemize your taxes. When you make a charitable contribution of cash to a qualifying public charity, in 2021, under the Consolidated Appropriations Act, you can deduct up to 100% of your adjusted gross income. Ensure you keep a record of the contribution and an appraisal of any non-cash donations for your tax return.

Hold onto your investments a little longer. Aim for all your investment gains to be long-term ones, meaning that you held the asset for more than a year before selling it. Long-term capital gains tax rates are 0%, 15%, or 20%, with most of us probably facing the 15% one. Meanwhile, short-term capital gains for assets held a year or less before being sold are taxed at your ordinary-income tax rate, which could top 30%, depending on your income level.

Take advantage of any tax credits the government is willing to offer. Tax credits are more favorable than tax deductions because tax credits reduce tax liability dollar for dollar. The most optimal of all is the refundable tax credit because you're paid out in full even if it brings your tax liability below zero and means you're due a refund. Note that the 2020 stimulus payments resulting from the CARES Act were considered an advance form of refundable tax credit and will not add to your taxable income. The same is true of the second stimulus check approved on December 27, the recovery rebate, and even the most recent 2021 American Rescue Plan stimulus approved by President Biden.

One last option to stop taxes in retirement from eroding your savings might be to consider a move to a more retirement-friendly state. From Social Security and pension income to property and sales tax, states treat these quite differently and could be in your favor. Alabama doesn't tax Social Security, and Illinois provides exemptions for many types of retirement income. Mississippi allows pension and social security payments to be subtracted or excluded from state taxable income. And Wyoming doesn't levy an income tax and offers a state sales tax of merely 4%. Paying taxes during your retirement can cause frustration if you haven't planned adequately. You need to know what's most costly and how to manage your monthly budget so that you keep your hard-earned savings in your pocket rather than in Uncle Sam's. Reach out to your financial professional today to develop a plan for your best life after retirement.



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  • “The Consolidated Appropriations Act Changes to the Charitable Income Tax Deduction” JD SUPRA. [Accessed Jan 20, 2021]
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  • “The Most Tax-Friendly States to Retire” U.S. New & World Reports. [Accessed Jan 19, 2021]