Learn from EP Wealth’s Regional Director, Rich DeRafelo, CFP®, how proactive tax planning can help keep retirement income on track. Explore strategies like Roth conversions, QCDs, trusts, and more.
My years as a Certified Financial Planner® have taught me that this adage really can be true: “The IRS wins when you plan for reducing taxes year by year. You win when you plan for reducing your taxes over your lifetime.”
Too often, people focus narrowly on reducing taxes during the first few years of retirement without looking further ahead. As a result, they may face high tax burdens later in life. An advisor can help you work from a more complete picture, building 30- to 40-year cash flow projections to show not only what the first stage of retirement looks like, but also what happens as required distributions, Medicare premiums, and estate issues come into play.
The reality is that ongoing adjustments to your tax strategy are necessary both before and after retirement. By taking a wide-angle view from the start, we give ourselves the best opportunity to identify which tax-efficient strategies may best serve your goals along the way. Some of the potential approaches I discuss in this blog include:
Keep in mind that not every strategy is right for every person’s situation. At EP Wealth, we have a vast array of options in our toolkit, but we will not know which tool to use until we have first completed a comprehensive analysis of your full financial picture.
Diversification is usually thought of in terms of investments, but it’s just as important when it comes to taxes. Tax diversification means building resources with a mix of pre-tax, after-tax, and Roth contributions.
Qualified retirement accounts like 401(k)s and IRAs often build up quickly thanks to tax deferral, matching, and compounding growth. But they are tax-deferred, not tax-free. If all of your resources are in these accounts, your flexibility is limited once distributions begin.
By contrast, having taxable brokerage accounts and Roth accounts available can provide valuable options. For example, contributing to a Roth 401(k) while also receiving pre-tax employer matching contributions creates natural diversification within the same plan. This mix can make it easier to manage tax brackets later in retirement.
Long before retirement, one of the most important steps is to fully understand your employee benefits package. Tools such as salary deferral or bonus deferral let you shift income into future years, which can help manage which tax brackets apply to you today. Deferring until retirement, when your income is typically lower than during peak earning years, may allow you to pay less tax by moving income from higher- to lower-bracket years.
One powerful but lesser-known strategy is superfunding a Roth IRA through an employer plan. Traditional contribution limits cap how much you can contribute to a Roth or 401(k) each year. But if your plan allows it, Section 415(c) provides the ability to make additional after-tax contributions. These after-tax amounts can often be converted to Roth dollars, potentially allowing contributions of $60,000 or more per year.
There are many technicalities involved with this strategy, so clients and advisors must carefully review the details of the benefits package to see if it can be implemented effectively.
The Income-Related Monthly Adjustment Amount (IRMAA) isn’t technically a tax, but it functions like one. Higher-income retirees can face Medicare surcharges of more than $500 per person per month if distributions from large retirement accounts push income past certain thresholds.
One way to mitigate IRMAA is through qualified charitable distributions (QCDs). For those with charitable goals, directing money from a retirement account straight to a charity avoids adding that distribution to taxable income, which in turn may help keep Medicare premiums lower.
Tax law changes are a constant. No one can predict what the code will look like three years from now, let alone over a 30-year retirement. That’s why it’s important to revisit strategies regularly and adapt as needed. At EP Wealth, we dedicate an entire team to monitoring these changes and preparing to adjust client strategies accordingly.
Writing a check to a charity is often the least efficient way to give. There are several approaches that may offer greater tax advantages while supporting the causes you care about:
In practice, charitable strategies can be very personal. For example, a client recently came to us as they were entering retirement, and during the planning process we uncovered a charitable goal they had held for years but assumed was out of reach. Through our analysis, we were able to show them it was, in fact, possible.
To do this, we helped implement an options hedging strategy to reduce the risk in a large, highly appreciated position. Part of that position was contributed in kind to a donor-advised fund, giving the client the ability to make grants to the charities of their choice over several years. At the same time, the hedged equity collar strategy allowed us to begin selling down the concentrated position in a more tax-efficient way, while also helping to mitigate sequence-of-return risk in the early years of retirement.
In this way, we were able to support a philanthropic priority that had deep personal significance for the client while also creating a more tax-efficient approach to managing their retirement portfolio.
Estate planning adds another layer of opportunity for reducing taxes in retirement. Several tools may be available, each with different advantages depending on the client’s goals.
Transferring appreciated shares to children who are in lower tax brackets can reduce the overall family tax burden. If you were to sell highly appreciated stock yourself, the gain could be taxed at a higher rate and may even increase your income enough to affect things like IRMAA. By gifting shares instead, your children may be able to sell them at a lower tax rate, and the income would not count against your own Medicare thresholds.
A GRAT allows you to transfer assets to heirs while retaining income for yourself, with any growth above the IRS’s statutory interest rate passing to heirs tax-free.
As a hypothetical example, say you place $1 million into a GRAT with a two-year annuity. You may be required to take back the $1 million plus about $100,000 in interest over that period (depending on the IRS statutory interest rate). If the $1 million grows to $1.5 million, you would withdraw $1.1 million, and the remaining $400,000 would pass to your children’s estate tax-free.
SLATs are irrevocable trusts that can move assets out of an estate while still allowing spousal access. Often, one spouse will create a SLAT for the benefit of the other, and then the second spouse creates a SLAT in return. This approach allows both spouses to retain some access to the assets while still shifting future appreciation to the next generation. One important consideration: if you are gifting highly appreciated assets into a SLAT, you need to be careful about how it’s structured so that you don’t inadvertently lose the potential for a step-up in basis at death.
Each of these tools requires careful analysis to determine suitability. The right choice depends not only on numbers, but also on a client’s comfort level and lifestyle preferences. As I often say, “the ride matters.” The ability to understand and feel comfortable with the strategies being used can have a big impact on the quality of your retirement.
At EP Wealth, our advisors and financial planners work closely with our in-house estate planning experts and our tax team to put together a comprehensive financial plan for each client. While the specific tools we use may vary from case to case, reducing your tax bill after retirement is ultimately about building an evolving plan that adapts as your life and the tax code change.
Ready to take the next step toward a more tax-efficient retirement? Connect with an EP Wealth advisor today to start building a personalized plan that evolves with you. Contact us here.
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