Tax Efficient Retirement Planning:

Tax Efficient Retirement Planning

Whether it’s social security, medicare, tax diversification, stock options, sale of real estate, or business exit, our team has you covered. Pinnacle Private Advisors are here to ensure that we work with you and your tax professionals to make certain your money is always working harder and smarter. It s not just about what you make, it’s about what you keep.

  • Tax efficient Real Estate investments

  • 1031 Exchanges

  • Delaware Statutory Trusts

  • Tax deferred saving opportunities

Most retirees rely on a few different sources of income, and there are ways to minimize taxes on each of them.

  • Live in or move to a tax-friendly state.
  • Reallocate investments so they are tax-efficient and postpone distributions from retirement accounts.
  • Be strategic about Social Security: Depending on your other income, benefits may be subject to taxes.

Live in a Tax-Friendly State

One of the best strategies for saving taxes on retirement income is to live in or move to a state that is tax-friendly. In the wake of the Tax Cuts and Jobs Act, this will be especially important through 2025 when only a total of $10,000 in local property, state and local income, or sales taxes will be deductible for federal income tax purposes.1

Seven states have no income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only interest and dividends, but Tennessee will join the list of states with no income taxes in 2021.2

States are barred by federal law from taxing residents on retirement benefits earned in another state.3 So, for example, earning a pension in California or New York (high tax states) and relocating in retirement to Florida or Texas (no tax states) avoids state tax on this income.

Other states may have low-income taxes or special breaks for retirement income. Some, for example, may have no tax on Social Security benefits and/or on some or all of the income from IRAs and retirement plans.

Reassess Your Investments

You may want to change your investment holdings in retirement; not only to save on taxes but also to preserve the principal. Here are a few ways to go about it:

Municipal Bonds

Interest on municipal bonds is free from federal income tax, although the interest may affect the tax on Social Security benefits.4

Dividend Stocks

If you receive qualified dividends—essentially regular dividends from publicly-traded U.S. corporations, as well as certain foreign corporations—they are taxed at more favorable rates than ordinary income. The tax rate may be zero, 15%, or 20%, depending on your taxable income.5

Losses That Offset Capital Gains

You can use losses on the sale of securities and other property to offset capital gains so that you pay no tax on the gains. What’s more, if you have excess capital losses, you can use up to $3,000 to offset ordinary income (for example, bank interest), and any additional losses can be carried forward.

Avoid or Postpone RMDs

If you are at least 72, you do not have to pay tax on required minimum distributions (RMDs) from your traditional IRA if you transfer the funds to a charity.7 The RMD used to be 70½, but following the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019, it was raised to 72.8 Here’s what’s required:

  • Your IRA trustee or custodian must transfer the funds directly to an IRS-approved public charity.
  • You must receive a written acknowledgment from the charity as you would for a charitable contribution.7

There is a $100,000 annual limit for this strategy. If you are married, each spouse has a separate $100,000 limit. This strategy can only be used for IRAs, not for IRA-like accounts such as SEP IRAs or SIMPLE IRAs.7

Roth IRAs are not subject to RMDs.

Required minimum distributions for traditional IRAs and 401(k)s have been suspended in 2020 due to the March 2020 passage of the CARES Act, a $2 trillion stimulus enacted amid the economic fallout from the COVID-19 pandemic.10

Deferred Annuities

You can also postpone the need to take RMDs and ensure that you won’t run out of retirement income by investing in a special deferred annuity. You can use up to $135,000 (but no more than 25% of your account balance) from your IRA or 401(k) to buy a qualified longevity annuity contract (QLAC) within the retirement account. Funds allocated to the QLAC are exempt from RMD calculations.11

Payments from a QLAC do not have to begin immediately but must start no later than age 85. The payments are taxable to you, and the funds from the QLAC automatically satisfy RMD requirements for this portion of the IRA or retirement plan.11

Depending on the year you were born, your full retirement age ranges from 65 to 67.12

Be sure to consider a QLAC’s drawbacks before proceeding. There is no cash value that can be tapped before annuitization. There may be higher fees for this type of investment than others available through an IRA or 401(k) plan. And you must live to the targeted age (e.g., 85) to enjoy the income.

Be Strategic About Social Security Benefits

If you don’t need Social Security at full retirement age because you have other income, consider delaying the receipt of benefits until age 70. You’ll earn additional credits to boost your monthly benefits at that time, and you won’t have to pay taxes now on the benefits.

When you receive benefits, they are either fully tax-free or are included in your gross income at 50% or 85%, depending on your other income (including tax-free interest on municipal bonds). More specifically, if your provisional income (a term unique to the calculation of the taxable portion of Social Security benefits) is less than $25,000 if you’re single, or $32,000 if you’re married filing jointly, none of your Social Security benefits are taxed.

If you’re single and your income is between $25,000 and $34,000—or between $32,000 and $44,000 if you’re married filing jointly—then 50% of benefits are taxable. Having income over $34,000, or $44,000 respectively, means 85% of benefits are included in gross income. Married persons filing separately automatically have 85% of benefits included in gross income.

Because the portion of Social Security benefits that is taxable depends on your other income, try to control this as much as possible. Here are some ideas:

  • Reduce your adjusted gross income (AGI). Contributing to deductible IRAs and 401(k) plans if you are still working can reduce your AGI.
  • Limit the sale of securities. While sales should primarily be dictated by financial considerations, where you can, you may want to limit sales so that your income doesn’t push you over the 50% inclusion to the 85% inclusion.
  • Make withdrawals from a Roth IRA if you have one. Withdrawals from a Roth IRA are tax-free in retirement and are not taken into account in the computation of the tax on Social Security benefits.9