7 Best Ways Upper-Class Retirees Can Reduce Their Tax Bills
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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The upper class may not have the same struggles as the average person, but they do have one problem many people share: trying to minimize taxes on their income.
While “upper class” definitions can vary due to a wide spectrum of costs of living across the U.S., the minimum to be considered upper class is around $170,000.
If you’re retiring in a higher income bracket, here are seven tips to minimize your tax burden.
Keep an Eye on This Legislation
In 2017, President Donald Trump passed The Tax Cuts and Jobs Act (TCJA), which changed tax brackets more favorably for those making higher incomes. Those tax cuts end in 2025, but Aaron Brask, a fiduciary investment advisor with Aaron Brask Capital, expects that “[Trump] will make every effort to extend the low tax rates associated with that legislation.”
If his administration is unable to pass legislation saving those cuts, then the tax brackets and rates would change significantly, Brask said.
Engage in Strategic Asset Location
One of the easiest and most impactful tax strategies, however, is “asset location,” Brask said — clarifying this is where to put your money, not “allocation,” the process of deciding how much to invest where, which comes first.
“Once you have determined your overall asset allocation, the basic idea is to strategically locate assets across one’s taxable, tax-deferred accounts such as a traditional IRA and a tax-free growth account like a Roth IRA.”
He said he prefers not to locate stock positions within tax-deferred accounts because the long-term growth will ultimately be taxed as ordinary income.
“I also do not like locating CDs, money market funds or bonds within taxable accounts. Whether or not you are taking the interest out, it still ends up on your tax return.”
Employ Roth Conversions or Withdrawals
Retirees can also use Roth conversions or strategic withdrawal strategies to manage the timing of their taxes on their pretax retirement accounts like traditional IRAs or 401(k) plans, Brask said.
“By converting or distributing from these accounts earlier in retirement, they can reduce the size of the pretax accounts and corresponding required minimum withdrawals (RMDs).”
However, he warned that “they are not a silver bullet solution that applies to everyone.” While many people only consider the tax rate paid on a conversion, there are a variety of other factors that should be taken into consideration.
Make a Qualified Charitable Distribution
If you’ve got money to spare and you want to pass it on to heirs, IRA owners over age 70 1/2 are allowed to make a qualified charitable distribution (QCD) of up to $108,000 annually (adjusted for inflation) from their IRAs directly to charity, according to Bill Knox, senior director of technical consulting and strategic innovation projects at TIAA Kaspick.
This gift not only benefits the charity but also counts toward the IRA owner’s RMD for the year, reducing or potentially eliminating the taxes owed on the distribution. “Better yet, this opportunity does not require the IRA owner to itemize their taxes in order to receive the benefit,” Knox said.
Make Deferred Charitable Gifts
If giving is one of your strategies, another option is a deferred charitable gift annuity (DGA), “one of philanthropy’s best kept secrets,” Knox said.
“These life income gifts allow donors to contribute cash or other assets to charity, receive a current income tax deduction, bypass capital gains (if applicable) on the sale of contributed assets, and save money for retirement.” This provides a reliable and fixed annuity payment each year for the rest of their life.
Try Charitable Remainder Trusts
Lastly, charitable remainder trusts (CRTs) allow high-net-worth donors to provide for their loved ones and make a meaningful charitable gift all while reducing their taxable estates, Knox shared.
“CRTs allow a donor to, essentially, give a gift twice; first, an income stream for the donor’s loved ones, and second, the remainder of the trust to the donor’s favorite charity. Structured correctly, CRTs allow donors to provide loved ones with lifetime income while reducing estate taxes,” he said.
Relocate To a Tax Friendlier State
If you live in a state with high taxes, and you have the flexibility to move, relocating to a state with no income taxes can significantly reduce your taxes, Brask said.
“However, I regularly tell clients who are entertaining this idea: ‘Don’t let the tax tail wag the dog!’ In other words, don’t move just to save on taxes if it’s not an overall beneficial plan for you.”
The best way to land on the right strategy is to consult with a professional financial advisor, retirement planner and/or estate attorney.
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