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6 Important Tax Management Strategies for Seniors

By Jeffrey Bangerter

Even if you have done everything by the book for decades, chances are good that the COVID-19 pandemic has affected your retirement plans.

You work hard all your life to prepare for retirement. While savings and investment strategies are important, if you don't take the time to implement tax-management strategies, you're missing a critical piece of the puzzle! Making smart tax moves now can have a major impact on the potential success of your financial plan.While each person’s circumstances are different, the following tax strategy tips may help minimize your tax liability so you can keep more of your hard-earned money.

1. Take Advantage of Catch-Up Contributions

Once you’ve reached age 50, you may be eligible to make “catch-up” contributions to your IRA or Roth IRA. For the 2020 and 2021 tax years, the catch-up amount is $1,000 per year. 

The actual amount you’re allowed to contribute may vary based on factors like your earned income and whether you’re covered by a company retirement plan. However, it’s a great idea to work with your tax advisor to determine your maximum contribution amount and ensure you contribute as much as you can.

Not only will this reduce your taxable income for the current tax year, but it will also give you an opportunity for tax-deferred growth until you’re ready to start taking withdrawals.

2. Consider a Roth Conversion

If you think you’ll be in a higher tax bracket after you retire, doing a Roth conversion now might be a smart move. When you implement this strategy, you’ll pay taxes on the full amount you convert during the current tax year, instead of in retirement. You'll continue to enjoy tax-deferred growth, and you won’t owe any additional taxes when you start taking withdrawals.

Roth IRAs also don’t have required minimum distributions, so you can keep your money growing tax-free for longer. It’s important to note that Roth conversions aren’t right for everyone. Make sure to work with a tax advisor to weigh the pros and cons before making your decision.  

3. Consider a Qualified Charitable Donation

Once you turn 70 ½, you’ll have to take Required Minimum Distributions (RMDs) from your IRA each year. However, tax rules allow you to transfer all or part of your RMD directly to an approved charity. This is called a Qualified Charitable Distribution. 

These distributions are tax-free and non-deductible, so they won’t impact your tax bill. This allows you to meet your charitable goals while also satisfying your annual RMD.

5. Track Your Medical Deductions

You may have gotten into the habit of simply taking the standard deduction on your tax return each year. However, if you spend a lot on medical expenses, this could be a mistake. If you itemize your deductions and your medical costs add up to more than 10% of your adjusted gross income (AGI), you may be able to deduct them.

Some of the qualifying medical expenses you may incur include eye exams, glasses, dental visits, wheelchairs, insurance co-pays, and insurance deductibles. Some Medicare insurance and long-term care (LTC) insurance premiums also qualify.

Your tax professional can help you look for potential itemized deductions and determine whether it makes sense for you to take them or to stick with the standard deduction.

6. Plan Out Your Social Security Benefits

You can begin taking reduced Social Security as early as age 62 or allow the amount to keep growing until you reach age 70. If you can afford to wait, this is often a good decision. 

It’s also important to remember that if your income exceeds a set amount, up to 85% of your Social Security benefits may be taxable. Carefully planning out when to start taking your benefits can help you get the most money while also reducing the amount of income tax you’ll owe.

Optimize Your Retirement Plan Today

Want to learn more about these tax strategies and other ideas to help maximize your retirement income? Contact us today. We’re happy to assist you!




Topics: Retirement Financial Planning Financial Advisor Tax Planning Tax Management