By Gregory T. Freeman.
I work with retirees and retiree hopefuls every day and one of the most common problems I see is that people with other retirement planning firms are paying more than they should in taxes. I’ve met with retirees and pre-retirees saying they already have a financial strategist who’s addressing their taxes. While that may be true, not all tax strategists are the same! Are you sure your tax strategy is doing all it can for you?
It’s not easy to see when a tax strategy isn’t doing everything it could to reduce your tax burden. Sometimes other managers might not even see a strategy that could benefit you. And other times, they may simply lack the tools to execute an improved strategy. The expectation has been like that old school phrase, “You get what you get, and you don’t get upset.” Well, it gets me really upset knowing that people’s hard-earned retirement savings are dwindling unnecessarily simply because they don’t have a financial professional in their corner willing and able to think on their feet to provide an elevated tax strategy to their clients like you.
At the end of the day, I’m in this business to help people achieve the retirement they worked their whole lives to save for—it’s one of the greatest gifts I can possibly give to people. So, below I’ll outline an example of a unique tax-reduction strategy we’ve implemented when truly examining clients’ unique goals, applying our in-depth knowledge, and utilizing the breadth of financial tools.
Many financial professionals are well-trained in the many rules, limitations, penalties, incentives, and strategies to achieve certain financial goals. But it takes an extra step of critical thinking to know how to combine certain strategies well within the given rules and limitations to achieve a remarkably beneficial outcome for their clients. At Wellington Wealth Strategies, we make it our goal to find those strategies and offer them generously to our clients when it fits with their unique financial timelines, goals, and situations.
As the new year rolls around, our gift to you is a highly beneficial tax strategy that may help you reduce your tax burden in the coming years and many years after that: The Standard Deduction to Roth IRA Strategy. Here’s an example of how it works:
Example:
Let’s say a married couple over the age of 65 has been looking forward to retiring and has saved well for it but is staring down the barrel of a taxed retirement given they saved through a traditional IRA or 401(k). If this sounds like you, you’re not alone! We’ve noticed this as a highly common scenario, so stay tuned.
Because the traditional retirement account has a pre-tax treatment, it means this married couple would pay taxes on their withdrawals from these accounts. While the immediate solution may seem to bite the bullet and pay the taxes by liquidating your traditional 401(k) or IRA and transferring it all to a Roth IRA, which can be withdrawn from tax-free given its post-tax contribution status, there’s a smarter way to do this!
Instead of transferring blind of the tax year and your overall timeline, you can take advantage of the annual Standard Deduction!
The Standard Deduction for a married couple over age 65 will be $32,300 next year.
Theoretically, a couple in this situation could convert $32,300 of their Traditional IRA to a Roth IRA each year for five years (ages: 65-69) – and effectively not pay tax on any of it. What is meant by this is that they may take income from the Roth Conversion of $32,300 minus their standard deduction of $32,300 to offset their taxable income from the withdrawal from the traditional account. This would equate to an Adjusted Gross (Taxable) Income (AGI) of $0.
With this strategy, this couple could then take distributions from their non-retirement brokerage account to pay bills, expenses, and live life. Distributions from non-retirement accounts would likely count as capital gains rather than income, meaning they’d pay favorable tax rates—potentially even 0% in capital gains taxes on up to $94,000 in realized gains (not even counting their original principal investment) given their $0 AGI.
They could do this for about four years before they must take Social Security, which is commonly advisable around the ages 66-69 because at age 70 they max out their Social Security benefits. Why does the strategy stop after this period? Well, Social Security counts as taxable income and may change their taxable income situation. But in those four years, they would have converted roughly $125,000 to Roth tax-free and harvested roughly $380,000 at a 0% capital gains rate.
While we pride ourselves on having a fundamental understanding of financial strategies, laws, incentives, and limits, we never let it distract us from our ultimate purpose: providing you with the retirement you worked so hard to achieve. No matter what opportunities or barriers exist for you given your unique situation, we’re dedicated to applying our knowledge in a way that is tailored for your benefits and goals. So don’t wait c Click HERE to schedule your complimentary review or call us at (317) 846-5055 to get started on a custom-tailored retirement strategy built for you.
