Many people who go solo on their financial planning spend their working years on autopilot. Every month, when their paychecks come in, they make their automatic contributions to savings, retirement, and investing accounts, pay their bills, and enjoy what's left.
But once retirement rolls around, there's nothing "automatic" about the decisions that need to be made around taking distributions and securing your assets. Without careful planning, taxes and penalties can put a dent in your nest egg before your retirement has even really started.
Here are three common strategies that we often help our clients execute to improve their Return on Life in retirement.
- Roth IRA Conversions
A Roth IRA might already be part of your retirement portfolio. But there are many ways to utilize the Roth's tax advantages, even after you've retired.
For example, during a market downturn, you might convert depressed securities in a traditional IRA to a Roth IRA. Once the market recovers -- as, history tells us, it always does -- the value of those shares will grow tax free.
In some cases, Roth conversions can also prevent seniors from getting bumped into a higher tax bracket once they start taking required minimum distributions (RMDs) from their accounts at age 72. Calculating the potential risks and benefits of these conversions involves a careful analysis of the client's projected retirement income and tax situation.
- Qualified Charitable Distributions (QCDs)
Seniors aged 70 1/2 who give a portion of their RMDs from a traditional IRA to a 501(c)(3) qualified charitable organization can exclude those funds from their adjusted gross income. The maximum annual amount that can qualify for a QCD is $100,000. Married couples should note that joint gifting is not allowed for QCDs, so spouses can't both take RMDs from the same retirement account. QCDs also must go directly to a charity, not an individual owner or beneficiary.
QCDs can be an excellent option for charitable seniors who must take RMDs but don't need the money to cover expenses. Lowering adjusted gross income via a QCD can prevent folks from moving into a higher tax bracket, which might also prevent Social Security benefits from being taxed while also retaining eligibility for other beneficial deductions and credits.
- Updated Estate Planning
Most seniors have the basic building blocks of an estate plan in place, which includes, at minimum:
- Last Will and Testament, which memorializes your last wishes and describes how you want your estate to be distributed to heirs and other beneficiaries.
- Power of Attorney, which authorizes someone of your choosing to act on your behalf while you are still alive if you are incapacitated and unable to make decisions.
- Healthcare Directive, which explains how you want to be cared for if you become incapacitated.
- Living Will, which designates someone of your choosing to make important medical choices for you if you are unable.
However, even folks who have those bases covered need to review their estate plan considering the SECURE Act.
Effective January 1st, 2020, the federal government placed new restrictions on how beneficiaries can inherit retirement assets and how those assets are taxed. For example, your heirs are no longer allowed to "stretch" RMDs from inherited accounts over the course of their lifetimes. In most cases, those distributions now must be completed within 10 years. These and other rule changes have created situations where, from a tax perspective, it might be prudent to create family trusts and be more intentional about how certain assets are passed down, and to whom.
Financial planning should be convenient. But along the path to retirement there are many junctures where active decision making is critical. Let’s discuss how our Life-Centered Planning process can help you make those key decisions that will lead to a successful retirement.