Retirement Planning, Taxes

4 retirement tips with the Biden tax plan

After the Tax Cuts and Jobs Act of 2017, those taking advantage of tax deductions, contributing to retirement accounts, and diversifying their investments have most likely seen an overall increase in net worth. But all that diligent saving could be jeopardized once you retire if when just following the standard common advice, because it may not be enough to keep your nest egg from depleting rapidly.

Saving for retirement is important, but using the wrong advice can be costly to the success rate that it lasts 30 years or more. Retirees need to make sure their financial plans are properly equipped to handle the most common roadblocks experienced in retirement.

Here are four things you need to worry about in retirement:

1. Maximize Tax Deductions

Reviewing your tax return to maximize current tax deductions and planning ahead for the future is not something that only happens once per year. Establishing a year-round tax plan can help you reduce taxes and achieve your financial goals.

With so many options to choose from, here are a few tax-planning opportunities that are often overlooked:

Charitable Donations

When donating money to a qualified charity, you might be eligible to receive a deduction on federal and state tax returns. Cash contributions can be deducted up to 60% of your adjusted gross income (AGI) and contributions of appreciated capital gains assets –such as stocks, bonds, or mutual funds – up to 30% of your AGI.

In accordance with the SECURE Act of 2019, if you’re a retiree and didn’t reach age 70 ½ by December 31, 2019, you are now able to take the required minimum distributions (RMDs) by age 72.  You’re still eligible to execute a qualified charitable distribution (QCD), which allows you to transfer up to $100,000 from your IRA to a charity every year. By doing it this way, you either satisfy the RMD requirement or are lowering the balance so that amount will be lower in the future.

“Harvesting” Capital Gains

When you have a capital gain, capital gains tax may be owed. Through “harvesting” or offsetting a gain with a loss, capital gains tax might be avoided altogether.

If you had no capital gains during the tax year, you could use up to $3,000 in capital losses to reduce your regular income and you can carry forward any unused losses into future tax years if your net losses exceed $3,000.

In 2022, the long-term capital gain tax rate is:

• 0%: taxpayers in the 10% or 12% ordinary tax brackets;
• 15%: taxpayers in the 22%, 24%, 32% or 35% ordinary tax brackets; and
• 20%: taxpayers in the 37% ordinary tax bracket.

If you’re in the highest income tax bracket you’ll also be subject to an additional 3.8% on investment income.

“Bumping” your tax bracket

With the new tax laws, income tax rates are at historic lows for at least the next few years.

Taxable income is your regularly taxed income minus any adjustments, deductions, and exemptions. Qualified dividends and long-term capital gains are separate calculations. If you are in a lower tax bracket now, you could be missing opportunities to take advantage of potential transfers that can result in smart financial gains.

Taking advantage of current tax opportunities as part of a holistic financial plan can help you keep more of your hard-earned savings. Remember to account for state income tax.

Now might be the time to act if you’ve been looking for a chance to convert a traditional IRA (fully taxed) to a Roth IRA (tax-free) for tax-diversification purposes. Taxes are on sale, and the consequences might be minimal versus years ago, and probably more favorable than a few years from now, especially if income tax rates for higher earners increase. Keep in mind that having the proper tax adviser is key, as Roth conversions can no longer be recharacterized, or “undone.”

Figuring out all the right moves can be challenging, but never be embarrassed to ask for help.

2. Overall Risk Exposure

Investing can be an overwhelming and intimidating task. Your investments might be overexposed to risk if your portfolio is concentrated in a particular category. Generally, having a lot of investments does not necessarily diversify a portfolio. On the contrary, over-diversifying will deprive you of the gains of well-performing investments. Focus on variety, not quantity.

So why aren’t people correctly diversified? Surprisingly, many don’t even know how they are invested – whether it’s in stocks, bonds, mutual funds, annuities, or alternative investments. For the last several years, retirees have enjoyed substantial gains in their portfolios. In the last few months, market downturns should motivate people to take a closer look. Still, many don’t really know what to ask and are intimidated by their financial advisers.

It’s pertinent for Boomers to understand their investments, including what they should and should not be in. Keep tabs on your investments, remain alert with overall market conditions, and ask questions.

3. Income in Retirement

Planning for retirement is not only about accumulating your IRA, 401(k), or other employer-sponsored plans. It’s also about understanding how you may potentially be taxed in the future, choosing pre-tax or after-tax contributions, fees, and investment risks, and how not to outlive your savings, among other things.

Financial advisors stuck in the past continue to use outdated guidelines such as the Rule of 120 (previously the Rule of 100) which subtracts your age from 120 to determine how to invest among risk and non-risk accounts and the 4% Rule. The 4% rule was used to establish a safe rate on how much a retiree could take from a retirement account each year while also maintaining an account balance. The problem with the rule is it was developed during the mid-1990s when bond interest rates were much higher and the stock market was at all-time highs. Since then, bond interest rates have been much lower and there have been some major fluctuations in the market since the turn of the century.

Essentially, the potential risk of a prolonged negative market during the first two or three years of your retirement can be detrimental. To balance your risk and exposure in the stock market, an annuity with an income rider might be a great option, especially if we go through a period of no growth in the future.

(Question: I’m not sure how this relates to income planning. Shouldn’t this paragraph be in the tax planning section instead?)

4. Estate Tax Exemptions

In 2022, the federal estate tax exemption is $12.06 million for individuals and $24.12 million for couples, so chances are that estate taxes won’t be an issue for you. The problem for some will be state estate taxes which can be as low as $1 million. Even if that’s the case, if you have minor children or simply want your loved ones to bypass the expensive alternative of probate, you still need an estate plan.

Which legal documents are essential – a will, trust, durable power of attorney, health care proxy, or all of them? It depends on whether you have substantial assets, a blended family, children with special needs, or intricate requests. There is never a one-size-fits-all scenario.

By setting up a living trust, you’re transferring ownership of the assets for which you want to avoid probate without losing control. However, many people fail to transfer ownership, and probate avoidance is often lost.

If your estate is above the federal exemption, a living trust is probably not the best option, because you will typically retain control of your assets. On the other hand, an irrevocable trust might be more appropriate contingent on your goals and understanding all of the nuances that come without transferring ownership of your assets if you currently don’t have a plan, now is always a good time to set one up. And if you have an existing plan, you should review it at least annually and update it as needed. An elder law attorney can explain the differences between a living and irrevocable trust as well as the reason why one may be a fit over another.

About the Author


Carlos Dias Jr.

Carlos Dias Jr. is a financial advisor, public speaker, and president of Dias Wealth, LLC. Carlos is a nationally syndicated contributor for Kiplinger and has contributed, been featured, or quoted in several publications including Forbes, MarketWatch, Bloomberg, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today, and others. He’s also been interviewed on various radio and television stations. Carlos is multilingual, fluent in both Portuguese and Spanish.

Retirement Planning, Taxes

Carlos is a very professional and knowledgeable financial planner. He focused on my financial goals and answered all my questions. He helped me better understand my future retirement plans, as well as how my life insurance policy was set up. Truly thankful for Carlos and his team.

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