Woodstock Financial Advisor – Third Act Retirement Planning —

How To Pay Less Taxes In Retirement – Part 2

In Part 1 of Paying Less Taxes In Retirement we reviewed HSA health plans, keeping your income low for SS tax calculation, Roth Conversions, and bunching charitable deductions. In this article, Part 2, we are going to look at how bunching property taxes, Roth contributions, tax loss harvesting (one of my favorites), and annuities can help you pay less taxes in retirement.

Bunching Property Taxes 

In part one of this series, we have already discussed bunching charitable contributions in alternating years to help get you above the standard deduction threshold. The purpose of this article is applying the same principal, however with bunching property taxes. 

Just for the sake of an example let’s say that the standard deduction is $25,000. And your property tax is $5,000. So, if you itemize $5,000 in one particular year that, of course does not bring you above the $25,000 standard deduction. [The standard deduction if you are married is double than what it is if you are single.] So what you will do is instead of paying the $5,000 for your property taxes in year one, you will pay for year one and year two up-front, so you will pay $10,000. And that will get you much closer to the standard deduction. You can do the same with your charitable deductions as I wrote in part 1. If you will bunch that money with your property taxes as well, it can help take you over that standard deduction. Then what you do in year two will just use standard deduction that the government gives you when you are filing your taxes. Then in year three you will do the same thing again: you will bunch your property taxes and your charitable contributions and anything else you are able to bunch. For example, you could bunch medical expenses as well, to hopefully help get you above the standard deduction. Depending on what your tax bracket is, this could save you a decent amount of money in taxes, every other year, during your retirement.

Roth IRA Contributions 

Another incredibly good way to reduce your taxes during retirement is to make Roth retirement plan (IRA or401 (k)) contributions right away, as early as you can. As we do retirement income planning for our clients, some of our favorite money that we use comes from Roth IRAs because it is not taxed. It is not used to calculate the provisional income, which is what is used to determine your tax rate in retirement. It is also used to determine how your Social Security will be taxed. That said, with Roth IRA withdrawals, there are income thresholds that you need to make in order to be able to make the full contribution.  Once you make this contribution, it can be in the year of 2021 at $6,000 if you are below the age of 50, and it is $7,000 if you are above the age of 50.  When you make this contribution to the Roth, it goes in after you have already paid income taxes on it, and it grows tax deferred.  Roth IRAs can be set up at so many different online brokerage or custodians. 

And then when you get into retirement and you are ready to withdraw it, regardless of how much it has grown and even when you sell those securities, whether it be stocks or bonds, for a gain inside of the Roth, those gains are not taxed at all.  

You put the money in and the money could possibly grow, depending on what your particular investment does and what the markets do.  Then you can sell them, 5, 10, 15 years down the road, and realize a gain  and you can withdraw it for yourself during retirement and not pay any taxes on it whatsoever.  And particularly good for some clients that are  of that year.  Keeping this in view the great thing about a Roth is the more money you have in a Roth, the more you can use it to make sure that you do not go into the next bracket up.  And as we look at the bracket, sometimes depending on what year it is, sometimes the brackets can have two gaps in them, where there are big jumps.   This particular year, there is a jump from 12% to 22%.  That is a 10% jump, which is substantial.  When you are receiving income from your traditional IRA, your pension, or your Social Security, you can use the Roth withdrawals and distributions to keep your income under a certain threshold and in a certain bracket that particular year, which can also save you hundreds, if not thousands of dollars, depending on how much you are withdrawing, what’s your income, and what your bracket is. So as you can see, Roth IRA contributions are a particularly good way to save on your tax retirement, and it I s something that we use with our clients on a regular basis.   

Tax Loss Harvesting 

Tax loss harvesting is one of my favorite ways to save our clients’ money during retirement inside of taxable accounts only.  

With tax loss harvesting, which is also called tax loss selling, we sell some of our clients’ securities from their taxable accounts at the end of the calendar year to realize losses and gains that are equal, so the losses and gains offset each other.  

As an example, a stock shows a short-term loss of $4,300 and you have a stock that shows a short-term gain of $4,300 dollars.  In December of that year, you could sell both stocks and there would be no taxes on the transactions. This strategy can also be used for long-term capital gains which are taxed at a lower rate. As another example, you can have a mutual fund or ETF as a gain of $5,000 which it is a long-term gain and you can also have a stock, bond, mutual fund, ETF with a loss of $5,000.  If you sell both at the end of the calendar year, say in November or December, you will not have to report any type of gain or loss on these transactions.  

Another important part to tax loss harvesting is that you do not want to stay with cash once these deals have been made. You want to purchase other securities for your account that are similar to what you have sold.  For example, if you sell a mutual fund or ETF that is an index of the S&P 500 what you will want to do is buy another mutual fund or ETF that is not the exact same one but is also invested in the S&P 500 index.  When you are dealing with individual stocks it is a little different.

In this particular example with individual stocks you would want to go back and buy the same type of sector and market cap.  Let us say for example in November and December you sold Apple (loss) and Facebook (gain). You would want to sell the stocks and then buy stocks that are similar like Amazon and Microsoft. Apple, Facebook, Amazon, and Microsoft are all large cap technology stocks. And if you own enough stocks you can do this technique each year with no problems. In the taxable accounts we manage our clients’ hold around 100 US and International stocks in their account.  This allows us at the end of each year, regardless of what the markets do, to have gains and losses of some of the individual stocks. In the years where the markets go down you still should have some stocks that have gains. In the years where the markets go up, you would have some stocks that have losses.    

We use tax loss selling as described here which allows us to really control the realized gains and taxes on our clients’ taxable accounts.  Sometimes we are able to run an account for years with little to no taxes on the account, using this strategy, depending on the client’s withdrawal needs and warning time on the account. This will likely save you tens of thousands of dollars in taxes over a long period of time if executed properly each year. Tax loss harvesting will not protect you from paying taxes on interest and dividends. 

Annuities for Tax Deferral  

For some clients it is wise to purchase annuities to help save on taxes during retirement. I know we have all heard many negative things from experts like Clark Howard and certainly for good reason. Some annuities have extremely high commissions and make it difficult for an investor to get a good deal or make a wise investment. However, as a fee only planner I have access to annuities that have been created by insurance companies in recent years that have no commission to get in and no commission to get out. And these annuities are useful in deferring taxes and many do not even have a required holding period.

An annuity can be purchased inside of an IRA and in those cases the money will, of course, continue to grow tax deferred, then when the money comes out it will be taxed 100% as income, just like any other traditional IRA or retirement plan withdrawal (except for Roths).  

If you have a taxable account mainly consisting of bonds in it and it is producing a tremendous amount of interest income where you are having to pay taxes on the income, it could be a good idea for you to move money from the taxable brokerage account or fixed income account to an annuity. 

We will transfer the money to a non-qualified annuity (no commissions of course). Then when you withdraw it, it will only be taxed on what has grown. So let us say you are putting $100,000 and it grows to $105,000 then part of that is going to be a return of principal and part will be taxed as income. This is if it is a Single Premium Immediate Annuity (SPIA) or in annuitization payout phase. If, on the other hand, it is a variable annuity, if you take out $5,000, that will be treated as ordinary income. With a SPIA our client will invest a lump sum contribution to get started and they will begin making regular payments back to the investor. 

In summary, annuities can be good if you want to transfer some money from a taxable account where you are getting beaten up with paying taxes on realized gains, interest, or dividends and you are unable to implement tax-loss harvesting and you want that money to grow tax deferred so it may compound much better. Keep in mind that any money that you withdraw from an annuity that is a gain will be taxed as income even if it is not inside of an IRA.


Set up a  20 minute call with Thomas Cloud, Jr., CFP(R) to discuss how you may be to use a Roth, bunching property taxes, annuities, and tax loss harvesting in your taxable accounts to lower your taxes in retirement then click here and schedule it now: https://calendly.com/thomascloud/retirement-ready-success-call. You may be wondering if you are reducing your taxes as much as legally can. The laws change regularly and we stay on top of them and have been helping our clients reduce their taxes during retirement since 2000. There is no cost or obligation.

Also I encourage you to watch my free retirement video: https://go.thirdactretirement.com/strategy.

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