Year-End Tax Strategies

In the past few years there have been a plethora of changes to tax laws that have had a big impact on retirees, and even more will be happening in the coming years.

One of the biggest changes: increasing the age when you must begin required minimum distributions (RMD) from retirement accounts from 70 ½ to 72.

However, tax law changes make it imperative that you sit down with both your accountant and your financial planner before the end of the year to ensure that you take advantage of the best year-end tax strategies.

Here are five solid tax considerations for seniors and retirees.

Legacy vs Live for Today

Do you want to leave a legacy, or do you plan to enjoy life?

“Is your goal to build a legacy for your family or for a charity or do you plan to spend your money on yourself?” asks Jennifer Belmont Jennings, senior wealth advisor at Hightower Wealth Advisors in St. Louis, Missouri. “Because that’s going to change how you put money away.”

“Everybody has different priorities,” Jennings points out. “Some people say ‘my kids are on their own. I’ve given them all that they need. I’m going to spend every penny of this.’ But for some people it’s really important to make sure that they’re passing something on to the next generation.”

Taxes: Now or later? 

Do you want to pay taxes now, or later?

“For example, if you have a Roth 401(k) at work, you can put after tax money in it, which means that you paid the taxes on it now and when you pull out the money later, you won’t have to pay taxes on it, or if your children inherit the money later, they won’t have to pay taxes on the withdrawals,” says Jennings

“If you use a traditional 401(k), you’re getting a little bit of a tax break now,” Jennings says. “But when you have to withdraw that money later, or your children have to withdraw that money later, they’ll be paying ordinary income tax on the withdrawals.”

Retirement accounts: How much? 

Maximize contributions to your retirement accounts, experts advise.

“Save taxes now is a maximum-used opportunity by the end of the year  – to maximize your contribution limits on your retirement accounts,” says Beau Henderson, founder of RichLife Advisors in Atlanta.

Surprisingly, only 10 to 12 percent of 401(k) plan participants reached their contribution limits at the end of last year, according to Fidelity Investments and Vanguard. Even more surprising is that only 13 percent of participants took full advantage of the over 50 catch-up provisions.

Time your Roth 401(k) conversion

It’s a good year to do a Roth 401(k) conversion

A conversion involves transferring money from a traditional IRA to a Roth. Contributions to a traditional IRA a tax deferred. That means you must pay taxes when you withdraw those funds. If you convert to a Roth IRA, you must pay those taxes when you do the conversion.

But if your traditional IRA’s value has dropped, you’ll pay tax on less money when you convert. For example, say your traditional IRA was worth $200,000 and its value dropped to $150,000. You convert $150,000 to Roth instead of the $200,000, cutting thousands of dollars from your tax bill.

“This year is an especially good year to do that – the conversion of a Roth – because we pay tax on the amount we move.  When the market is down,” says Henderson, “we can do conversions on sale. So, it’s a good year for us to look at conversions, and to our block of investments and move them over cheaper into that tax free status.”

Accountants and Financial Planners: Can We Talk?

Make sure your accountant and financial planner talk.

Both have your best interests at heart, but their goals are different. The CPA is more tactical while the financial planner is generally more strategic.

“Your CPA typically is focused on all the things we can do this year to pay as little taxes as possible,” Henderson says. “Financial planners are thinking “what can we do this year, like Roth conversions, that will benefit me over the next 20 years. Sometimes you have to weigh the long-term strategy vs. this year’s tax return.”

Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.

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