5 Tips for Retirees- Tip 1- Tax Bracket Management

In this video, Matt and Chris discuss tax management tips for retirees. Tip #1 focuses on effectively managing your tax bracket during retirement. They emphasize the importance of having a mix of pre-tax and Roth accounts and strategically coordinating required minimum distributions (RMDs) to stay within the lower tax brackets. They discuss scenarios where clients may need to spend more than expected and how Roth planning can help manage taxes efficiently. They also address the “widow penalty” and how Roth planning can offset potential tax increases when one spouse passes away. The key takeaway is that individualized tax planning is crucial for retirees to optimize their tax situation.

Video Transcript

Matt from EWA. Chris from EWA. Today we are talking about five tax tips for retirees and tip number one is how to most effectively manage your tax bracket during your retirement years. So Chris, first let’s talk about from a federal tax bracket management what are some best tips and tactics to make sure that clients are paying as little in tax as possible and keeping as much in their pockets as possible.

It’s a great question. So whenever you’re entering retirement, very important that we have a healthy mix of pre -tax and Roth accounts to supplement your your spending during retirement. Generally you’ll have social security coming in which will fill up the 10 and 12 percent tax brackets.

So we want to coordinate RMDs to make sure that we’re only filling up the low tax rates and avoiding the high tax brackets during retirement. Yeah, so for example what we have up on the screen now are the married tax tables. So our rule of thumb is to always recognize income up to the 10 and 12 percent tax brackets.

So the 12 percent cuts off at 83 ,550 but if you’re marrying married filing jointly you get a standard deduction at 25 ,900. So this our limit is really closer to 108 ,000. So if we walk through a client example let’s say social security between you and your spouse is $50 ,000.

This is only 85% taxable. So although you’re receiving 50 that only counts towards 42 ,500. This allows us to pull out of IRAs or do Roth conversions or even realize gains in a taxable account environment as you pay a 0% capital gains rate as long as your income’s below 83 ,550.

Interesting. So basically, if a client has a lifestyle, you know, potentially that’s about $10 ,000 a month. There’s a chance they could pay 10, 12% on federal, potentially pay 0% in capital gains, and then manage Medicare brackets effectively, Roth conversions effectively.

For clients that live off of more than $10 ,000, let’s say someone lives off of $20 ,000 a month, what are some tips and tactics for navigating that properly, taking into consideration the same tax tables, but also, for example, Medicare costs? Great question. So for somebody that has a substantial income need during retirement, our recommendation would be to realize income up to the 24% tax bracket.

We could do this by realizing gains up to the 23 .8% capital gains rate, or from Social Security, pensions, IRAs, all the way up to $340 ,100, which is where the 24% bracket ends. Excellent. So capital gains are part of that $340 ,100. What ways or methodology will we use if someone needs to spend more than that amount?

Where would we pull from at that point to avoid going from 24, for example, to 32? Great question. That’s where Roth planning really does come into play. Ideally, we have a healthy mix of pre -tax and Roth accounts. So once we hit that 24% bracket, to avoid going into the 32, 35, 37, we can pull from your Roth IRA, 100% tax -free at that time if additional funds are needed.

So Chris, what happens if, God forbid, one spouse passes during retirement, and let’s say it’s an after -requirement distribution that started? How does the tax situation change at that point? Excellent question. So this is something that we’ve referred to as, it’s called the widow penalty.

And if we go back to the tax tables, what this means is if you go from filing as a married couple, for example, let’s just look at the 10% bracket you have up until $20 ,550 here, but this is cut in half if you’re filing as single. So essentially, filing as single versus married, you accelerate through the tax brackets twice as quick.

And although it’s just one of you in the picture, overall, your expenses taking into taxes could be just about where they’re at even while you were married, if it’s just one person in the picture. That’s a good point, Chris.

The only thing that changes if one spouse passes and one spouse is still here, is we’ve lost one social security bill. Let’s say the surviving social security, the higher of the two always stays if the spouse were married for greater than 10 years. So let’s say that social security payment was $40 ,000, required distributions were $200 ,000, that’s a total of $240 ,000, then let’s put, plus let’s say dividends and interest were another $60 ,000, that’s a total of $300 ,000.

That couple, as we see in the married filing jointly, would have clearly stayed under 24, because we have up to $340 ,000 of income to pay 24 or 22 ,000, 12 ,000. However, if it’s now a single payer at that same income amount, you can see that that 24% ends at 170%, which is half the amount.

And so a good, a very significant portion of that person’s income is now getting taxed at 32, and part of it’s even getting taxed at 35. So that’s a pretty substantial 8 to 11% increase in taxes on a portion of income if one spouse passes. So again, to what you said before, Chris, Roth conversions and Roth planning overall can completely offset this risk if done properly.

The widow penalty can be avoided with Roth planning. Alright, with that as tip number one, everyone’s situation should be analyzed individually and specifically, and we look forward to doing so for you.

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5 Tips for Retirees

5 Tips for Retirees- Tip 2- Medicare Planning
5 Tips for Retirees- Tip 3- Social Security Do's and Don'ts
5 Tips for Retirees- Tip 4- Exercises to Prepare for Retirement
5 Tips for Retirees- Tip 5- Set After Retirement Goals

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