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Advising your clients on the best path to retirement is a significant part of financial planning. But offering strategies to help reduce their taxes during retirement is equally valuable, as taxes can take a bite out of your client’s retirement income.

Here are five important strategies to discuss with those clients who are in or approaching their retirement years to help them realize significant savings.

1. Roth Conversions

For clients with sizable balances in traditional IRAs or 401(k)s, their required minimum distributions (RMDs) can represent a significant tax hit each year. Jim Blankenship, CFP, EA of Blankenship Financial Planning, suggests converting money from traditional IRAs to Roth IRAs as a way to reduce your future income taxes. 

“Lower RMDs mean less taxable income, which can result in lower taxes on Social Security benefits, lower Medicare premiums and potentially greater deductions for items tied to their AGI,” Blankenship explains. “Reducing or eliminating RMDs through Roth conversions can have a dramatic impact on your client’s future tax costs.”

Roth conversions may be especially attractive in 2020 due to the lower tax rates in effect as a result of tax reform legislation enacted in 2017. Taxes due on a Roth conversion will need to be considered versus the potential tax savings down the road. 

2. Qualified Charitable Deductions (QCDs)

Taylor Schulte, CFP of Define Financial, suggests the use of QCDs for clients who are at least 70½ and who have charitable inclinations. QCDs can be taken from a traditional IRA and up to $100,000 can be contributed to a qualified charitable organization. 

The benefit is that the amount of the QCD is not subject to federal income taxes. Though no charitable deduction is available to those who can itemize, these distributions are not taxable. QCDs were originally tied to RMDs as a way for those account holders to get a tax break for contributing to charity in the event they were not able to itemize deductions. 

While the SECURE Act raised the age to start RMDs to 72 as of January 1, 2020, the age for taking a QCD was left at 70½. Even if they are not yet offsetting an RMD, the QCD is still a tax-free way for your clients to use IRA funds for a charitable contribution and will reduce the amount subject to RMDs in future years.

3. Paying Off Their Mortgage

For clients who can do so, paying off their mortgage prior to retirement can save on taxes by potentially reducing the amount they will need to withdraw from traditional IRAs or other retirement accounts that would be subject to taxes. This has the double benefit of reducing your client’s overall expenses in retirement and reducing their taxable income.

4. IRA Contributions Beyond 70½ 

The SECURE Act removed the maximum age, formerly 70 ½, for contributing to a traditional IRA account. For clients who have earned income from employment or self-employment, they can make pre-tax contributions to a traditional IRA account. This serves to reduce their taxable income for the year and adds additional tax-deferred savings to their account. Any income restrictions for those who are working and covered by a workplace retirement account will still apply. 

5. Deferring RMDs While Working

If your client is working past the age to commence their RMDs, they can defer taking their RMDs from their current employer’s 401(k) plan, as long as they do not own 5 percent or more of the company. The employer must opt to offer this deferral. 

If their plan allows it, they can potentially do a reverse rollover of an IRA or old 401(k) plan into this plan as well, given those funds were originally contributed on a pre-tax basis. These funds will not be subject to an RMD either. Before doing a rollover, your client should assess the quality of the investments offered by their current plan. RMDs connected with other retirement accounts must still be taken; this deferral does not apply to those accounts. 


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