5 Tax-Saving Strategies for Your Retirement Plan
5 Strategies for Saving Taxes in Retirement
When planning for retirement, taxes often aren’t the first thing that comes to mind. But did you know that taxes could be one of your largest expenses in retirement?
Most people only think about taxes in tax season and forget about them once their return is filed. However, to minimize your tax burden, it’s essential to consider taxes all throughout the year. This is especially true in retirement when you’re drawing from your accounts instead of contributing to them.
Let’s explore five strategies to help you save on taxes during retirement.
1. Reduce Your Exposure to the 3.8% Medicare Surcharge Tax
If you have a higher income and earn investment income, it’s important to be aware of the 3.8% Medicare surcharge tax.[1] This tax applies to individuals and couples whose income exceeds certain thresholds, contributing more to Medicare to support the healthcare system. Here’s how it works:
For singles earning over $200,000 or married couples earning over $250,000, this 3.8% surcharge tax may apply. The income limits are based on your Modified Adjusted Gross Income (MAGI)—your regular income with some deductions added back in, like tax-free foreign income, IRA contributions, and student loan interest.
The surcharge tax targets earnings from investments such as stocks, bonds, and real estate, including interest, dividends, annuities, capital gains, passive income, and royalties. The IRS calculates this tax on the lesser of your total net investment income or the portion of your income exceeding the $200,000 or $250,000 limits.
If your MAGI is close to or exceeds these thresholds, there are strategies to reduce your exposure. Start by reviewing the tax efficiency of your investments. Consider shifting less efficient investments into tax-deferred accounts and utilizing tax-loss harvesting. Other strategies include investing in tax-free municipal bonds, using capital losses to offset gains, and taking advantage of installment sales to spread out large gains. Real estate like-kind exchanges can also help defer taxes on gains.
2. Take Advantage of Roth IRA Conversions
Roth IRAs offer tax-free distributions, making them a powerful tool for retirement. However, due to income limits[2], many people cannot directly contribute to a Roth IRA. Instead, you can convert traditional IRA funds to a Roth IRA, but you’ll need to pay taxes on the conversion. Taking advantage of low-income years—such as when you’ve stopped working but haven’t yet started Social Security—can be an ideal time to convert to a Roth, setting you up for tax-free income later.
Be mindful of your tax bracket during conversions to avoid inadvertently triggering higher tax rates, and consider the impact of the 3.8% Medicare surcharge tax. Additionally, be aware of the Income-Related Monthly Adjustment Amount (IRMAA)[3], which increases your Medicare premiums if your income exceeds certain thresholds. For 2025, individuals with a Modified Adjusted Gross Income (MAGI) above $106,000 or couples above $212,000 will face higher premiums. With careful planning, you can manage these additional costs and maximize your Roth conversions without unexpected expenses.
3. Make the Most of the 0% Long-Term Capital Gains Tax Rate
If your income is low enough to avoid the Medicare surcharge tax, you might be eligible for the 0% long-term capital gains rate. This means profits from assets held for over a year can be tax-free if your taxable income is below $47,025 for singles or $94,050 for married couples filing jointly. Once these thresholds are exceeded, long-term capital gains are taxed at 15%, and the rate rises to 20%[4] when taxable income surpasses $518,900 for singles or $583,750 for couples.
To stay within the 0% capital gains range, consider claiming additional deductions or making deductible IRA contributions. However, it’s important to be strategic, as taking tax-free gains can increase your adjusted gross income, potentially affecting the taxability of your Social Security benefits. Additionally, state taxes could apply to your gains.
4. Plan Carefully When Managing Inherited IRAs
In 2020, the rules for inherited IRAs changed for non-spouse beneficiaries. Instead of taking a required minimum distribution each year, you now must withdraw the full balance within 10 years. However, failing to plan your withdrawals carefully could result in having to withdraw a large sum all at once, which could significantly increase your taxable income. This could push you into higher tax brackets and expose you to additional taxes, such as the Medicare surcharge tax. To minimize your tax liability, it’s essential to strategize your withdrawals if you inherit an IRA from someone other than your spouse.
5. Maximize Your Charitable Giving
If you’re inclined to give, charitable donations can be an effective way to reduce your taxes. You could qualify for a tax deduction of up to 60% of your adjusted gross income.[5] Donating appreciated assets, such as stocks, can be even more beneficial. When you give assets that have appreciated in value and you’ve owned them for over a year, you avoid paying capital gains taxes on the increase, while still claiming the full value as a deduction. However, if your assets have lost value, it’s better to sell them first and then donate the proceeds to take advantage of the tax loss.
Another option to explore is using a charitable lead annuity trust or a donor-advised fund. These allow for an up-front tax deduction, helping to offset other taxable income, like from a Roth IRA conversion or withdrawals from an inherited IRA.
How We Can Assist You
There are various ways to reduce your tax burden in retirement, but executing these strategies requires careful consideration of several factors. You don’t have to tackle this process on your own. Working with an experienced financial advisor can help you feel confident you’re making the best choices for your retirement plan.
If you don’t yet have an advisor, I’d be happy to chat with you and explore how the Boyer and Sappenfield Investment Advisors team can assist you. Take the first step toward taking control of your financial narrative today by filling out the contact form below!
[1] https://www.irs.gov/individuals/net-investment-income-tax
[2]https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2024
[3] https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles
[4] https://www.bankrate.com/investing/long-term-capital-gains-tax/#rates
[5] https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions
Tax preparation and services are not affiliated with Cambridge Investment Research Inc.
