Two Tax Strategies To Put In Your Retirement Toolbox

One of the most effective tools, if not the most effective tool in your retirement toolbox is a strong tax mitigation strategy. So today I want to talk about two considerations you might have when it comes to taxes. One really has to do with taking some steps before you retire. And another one has to do with some steps that you can take after you turn age 70. So before we get started, I just wanted to introduce myself. My name is Warren Berger. I'm the owner of luminary financial advisors. And we help people that are within five years to retirement or recent retirees create a plan that will help them through retirement and really with a focus on tax mitigation strategies. So let's talk about our topic today. First, I want to talk about this sort of lead up to retirement and thinking about taxes.

And so many people have access to a 401k or or another tax advantage tax deferred account that you may be using. You may have access to a Roth 401k that is that they've gained increasing popularity with companies over the last few years. And then of course you always have the option to work into a Roth IRA. And the reason I'm bringing up these Roths, the Roth strategy is a tax free strategy. So money that you put in is after tax, it grows tax free and it comes out tax free. Whereas tax deferred accounts are tax debt, ordinary income tax rates when they come out. And so that's important to know before we get started here, because as we get closer to retirement we may want to start looking at other options besides our tax deferred options so that we can start creating additional buckets and options to mitigate taxes as we enter into retirement, traditionally, the 401k option or that tax deferred option has been the choice because the idea was that in your high earning years, you're also in your high tax years.

And so by deferring those taxes to a point in time in your life, where for instance, in retirement, where the idea is that you're going to have less income, therefore lower your tax brackets. The idea is that it would be smarter to defer that so that you're gonna be paying less taxes in retirement. Great idea, and it still applies. But I think as you start getting closer to retirement, you may want to start thinking about diversifying those tax buckets. So if you have access to a tax free option, a Roth option you may want to start putting money in there that you can start to take out as you enter into retirement, because you can use a combination of the income tax being paid on your tax deferred with that tax free to sort of deliberately enter into the tax bracket that you want to. So the idea is that we're not gonna wait for tax brackets to come at us. We're going to actually mindfully distribute our income to ourselves in a way that's going to create the greatest tax relief and the lowest tax bracket. So not only do you have the Roth option that you can look at, but you can

Also look at your taxable accounts, which are essentially you know, brokerage accounts, things like that outside of that sort of tax shielded retirement accounts, those pay capital gains taxes, which have their own advantage in that they're taxed anywhere from zero to 20% in today's taxes based on your income. So if we have a situation where we can do a combination of potentially tax deferred money, whether you're paying income tax on or ordinary income tax on, and Roth where you're paying it's tax free and not considered in the equation and potentially some of this in investible account monies that are taxed at capital gains, we can actually create a situation where you are in a lower tax bracket on that ordinary income tax deferred. Or we can use that as an opportunity to do Roth conversions, where we actually are going to convert monies from the tax deferred into a Roth account where we're paying the taxes on them right now.

So hopefully we're paying them at a lower rate than they're going to be in the future. And a good example of this, you might say I'm in a higher tax bracket right now. So why wouldn't, I want to continue to defer taxes rather than start to look at these Roth options or this taxable account option. And just an example of this might be say that you're in for round numbers the 20% tax bracket, just, just to use a round number. And you are, you have $20,000 that you would be taking out under the 20%. If you were not to defer that money and put it into a tax free account or a taxable account, yes, you would be losing out on $2,000. That's 20% of that $2,000 of tax deferment that you'd be paying now. But if you look at that same account and it grows over the next 10 to 15 years where it was say $30,000 in that account, even though you may be at a lower tax bracket later, say in the 10% tax bracket, because so much money is in that tax deferred account, paying ordinary income taxes that now you're paying on that $30,000, even at 10%, you're gonna end up paying $3,000 in taxes.

So that strategy, now that's not gonna work in everyone's situation. And frankly you really should be going to your CPA with any of these strategies or your, your financial professional financial advisor just to make sure that it works with your own situation. But I think the real point that I'm trying to get across is that being mindful of these tax brackets, as you enter into retirement, you know, once you get into retirement, once you get to certain ages, you can't make these moves anymore. And so looking at say, five years before retirement, starting to, to get an idea about how we're gonna look to mitigate taxes in retirement can be really powerful. And we've had people that we've saved, you know, 250, $300,000 in taxes over the course of their retirement. It's that powerful? So it's just something to think about. Now, the other point that I wanted to make is you know, that initial point is really from 50 to 70 years

Old. So at age 70, you can start using qualified charitable deductions. And what that means is that you can take money directly from your IRA and give it to charity. If you're so inclined has to be a 5 0 1 C charity. And what that does is it, it will start to mitigate taxes that really start to occur at age 72 at age 72, you're required by the government to receive required minimum distributions, which is a percentage of your total IRA holding. And the idea is that the government is saying, Hey, you didn't have to pay taxes on that money over time. Eventually we want you to start paying taxes age 72 is when they're requiring you, requiring you to pay taxes on that money. Even if you don't need that money as part of your retirement plan, or you don't need all of that money, you're still gonna be required to take it out.

And you're still gonna be re required to pay ordinary income taxes, which is why even going back to the other mitigation strategy where we're looking to put more money into these tax free growing accounts that helps lower that amount of required minimum distribution at age 72, and therefore the ordinary income taxes that you're gonna have to pay on that money. But another way of mitigating that is using these qualified charitable distributions. Because once you turn age 72, if you're giving money to charity directly from your IRA, as part of this distribution, that counts towards your required minimum distribution. So you actually lower your RMD by the amount that you're giving to charity, ostensibly. So that's just another way that you can mitigate taxes if you are charitably inclined. And so these are just two things. There's a number of different strategies that go on and you really have to take a, a holistic, comprehensive view of your tax strategy in retirement.

But even if you're able to capitalize on one, two or three strategies, you're still gonna help yourself out in the long run. You'll be surprised at how much money and taxes you'll save over the course of your retirement. So I hope this has been helpful if it has please subscribe to the channel and, or like the video. And I also have a number of resources below that you can use they're free. I don't need your email. There are checklists and flow charts that you can use to help you think about some of the things that you're going to be looking at in retirement. I hope to see you again and thank you.