As you approach your retirement, it is high time you address your tax obligations. Retirement’s sweet spot is the period between formal retirement and when you begin accessing RMDs from your 401(k) plan or your individual retirement plan. Typically, this is around the age of 70.5 years.
Since you no longer have any full-time commitments, you are now in a lower tax bracket. Subsequently, this is the right time to benefit from low tax rates. Even so, you need to ensure that your overall retirement goals are in line with your retirement goals. Caveat! You shouldn’t focus on reducing the amount of taxes you pay instead, you should concentrate on accomplishing your retirement goals. So read on to find out more about how to leverage reduced tax rates. Here are a few suggestions you can capitalize on low tax returns.
# 1: Embrace Roth
Convert your presentIRA or 401(k) retirement plan into a Roth IRA. Though you must pay taxes on the conversion amount, it is at a much lower rate. On the other hand, retainingyour funds in a traditional IRA or a 401(k) plan without taking out any RMDs leads to higher taxes.
Roth IRA withdrawals typically charge no taxes. Plus, no RMDs requirements apply to them. Actually, you can pass accumulated Roth IRA funds and tax-freestatus to your heirs. Besides that, you can stretch a Roth IRA over several years to minimize the impact of taxes as well speed up switch over to a higher tax bracketanytime you want. But before initiating a conversion, you need to consider the following factors.
To begin with, ensure that you have sufficient cash resources for settling your due taxes. Beware that 2018 tax rules allow for no conversion reversals ever. This means that your assets are permanently locked in a Roth IRA. Besides, you must abstain from tapping into a Roth IRA’s assets for five years after conversion.
Offload Valuable Assets
You might have stock or assets held in a taxable account. If so, consider offloading your long-term high-value assets when your tax obligations are still minimal. Doing so lets you benefit from any appreciated gains. Why is this so? Because any long-term gains on capital are adjusted relative to your gross income (see the table below).
|Tax Rate||Single Taxpayer||Married Filing Jointly||Head of Household|
|0%||Below $38,600||Below $77,200||Below $51,700|
|20%||Over $425,800||Over $479,000||Over $452,400|
Selling any appreciated assets when your income is below the 0% threshold attracts tax at a rate between 15% and 20%. Also, if you are married with gross revenues of $250,000, a 3.8% tax is imposed on any other income you earn.
Leverage Employee Stock Options
Take advantage of low tax rates with employee stock options in your retirement twilight years. Doing so when your stock’s value is high and prices are low will increase your gains. Plus, use low tax years to offload most of your employee stocks.
Get Rid of Saving Bonds
Today, US saving bonds aren’t a viable means of long-term asset growth because of low interest. This is why many retirees hold on to bonds issued during high-interest rate periods. Offloading these bonds means you only pay ordinary income tax on any accumulated interest. So selling off these assets is a great financial coup.