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.