For most retirees, their financial focus is to ensure they have a reliable income and can still afford the things that matter to them. Outside of paying taxes each April, they may not consider how to lower the amount they owe the IRS. As such, many retirees underuse two tax-optimization strategies that can meaningfully impact their after-tax income.

1. Roth Conversions

After you retire, but before starting Required Minimum Distributions (RMDs) or Social Security, you may be able to convert money from your traditional IRA to a Roth IRA.

Why transition your account?

Roth conversions allow you to pay taxes now to avoid potentially higher taxes later when you make withdrawals. The appropriate amount to convert depends on your tax bracket, your goals, and the additional tax you’re comfortable paying each year.

A financial professional can run scenarios to help you understand the right time (if ever) to convert.

At Credent, we analyze Roth conversions as a tax-optimization strategy in every applicable plan. With our planning software, we can show you the tax and portfolio impact of a conversion and pinpoint when paying taxes earlier becomes a net benefit to you and your heirs.

Knowing the exact cause and effect of a Roth conversion provides hope and confidence that you are making a wise financial decision.

Qualified Charitable Distributions (QCDs)

If you’re 70½ or older and give to charity, you can donate directly from your IRA. The distribution counts toward your Required Minimum Distribution but isn’t reported as taxable income. For charitably inclined people, this can meaningfully reduce your overall tax bill.

Again, a financial plan is an invaluable tool that shows you how much you can give towards the things you value while maintaining your lifestyle and achieving your goals.

“I already use these tax-optimization strategies. What else is there?”

If you’re already checking these boxes, what other tax-optimization strategies can you consider?  

– Asset location strategies

Evaluate the types of accounts housing your assets and how those accounts are taxed.   

For example, since you won’t pay taxes on the growth, it often makes sense to put your highest-growth potential investments into an after-tax Roth account instead of a tax-deferred or taxable account.   

To dive deeper into asset location strategies, reference our article: “Asset Location Strategy: A Tax Concept Most Investors Never Consider.” 

– Asset withdrawal strategies

Beyond where you put assets, consider the breadth of accounts you have and your strategy for withdrawals.  

It’s usually wise not to put all of your eggs in one basket and to take money from your accounts at different times and for different purposes.  

For example, cash accounts are a first line of defense for surprises and opportunities because they are immediately available without selling investments or triggering a tax event. Alternatively, Roth IRAs and similar accounts allow you to withdraw funds tax-free in retirement, which can be valuable for managing your fixed and recurring expenses.  

– Annual Reviews

Tax-optimization strategies don’t have to be complicated. Something as simple as attending a yearly meeting is a great next step. 

At a minimum, we meet with every Credent client annually. During this meeting, our team members can review your plan, learn what has changed, and recommend tax-optimization strategies for your stage of life. If you haven’t attended a Goal Review meeting in a while, the opportunity to minimize taxes is a great reason to reengage.

Explore Tax-Optimization Strategies Today

By adjusting how you give, where you store assets, and when you choose to shift or withdraw those assets, you may be able to pay less in taxes, using the money you save to do more of what you love in retirement.  

To talk to an advisor about the tax-optimization strategies that could work for you, reach out using the form below.

Want to read more like this? Check out “5 Tax Mistakes Costing Retirees & Pre-Retirees Thousands.”