Even during the so-called golden years, tax rules can have a funny way of chewing up retirement savings. However, there are certain deductions and strategies that retirees can implement to help protect a hard-earned stash.
After turning 70 1/2, all individuals must make required minimum distributions (RMDs) from an individual retirement account (IRA), SIMPLE IRA, or SEP IRA. A standard table from the IRS will calculate this amount, and in general, an RMD is taxed as ordinary income. Essentially, the requirement is to distribute annually a percentage of the net asset value held in each tax-deferred retirement account, explains Marc Minker, lead managing director at CBIZ MHM, a national accounting and professional services provider.
"This can be quite frustrating in the sense that an individual may be forced to sell particular holdings, whether appreciated or depreciated, before they would ordinarily want to in order to meet the RMD," Minker says.
But there are some strategies retirees can consider to help keep the tax man at bay. Minker offers up several ideas, including:
- Consider a Roth IRA, or perhaps a conversion from a traditional IRA to a Roth IRA. (Roth IRAs do not require withdrawals until after the owner’s death.) However, a conversion to a Roth usually triggers a tax event. This can mean all gains and pre-tax contributions will be taxed at the time of conversion.
- Retire in states such as Florida with no state income taxes.
- Invest in municipal bonds in a taxable brokerage account.
- Live off of appreciated securities in a taxable brokerage account, qualified dividends, and try taking advantage of a long-term capital gains tax rate for investments held longer than one year.
- Consider whole life insurance policies and annuities.
Gifts made during one’s life are subject to gift tax, but there are gift exclusions that you can consider. "Gifts or gratuitous transfers are not deductible for income tax purposes, nor are they includable in the recipient’s income taxes," Minker says. But in 2016, $14,000 per year per recipient may be excluded from gift tax. Married couples may donate a total of $28,000 to each recipient.
Gifts can also be utilized for tuition or medical expenses, Minker says:
- An unlimited gift exclusion is allowed for tuition paid directly to an educational organization on behalf of a donee.
- An unlimited gift exclusion is also allowed for medical expenses paid directly to healthcare providers on behalf of a donee.
Keep Those Doctor's Bills
There are also medical deductions that those age 65 or older can consider. Here's how that works: "Unreimbursed medical expenses are deductible against income for those taxpayers who itemize deductions and the total medical expenses exceed 7.5% of adjusted gross income for taxpayers 65 and over as of the close of the tax year," Minker says.
Taxpayers under 65 must meet a threshold of 10% of adjusted gross income, Minker says. Medical expenses that count include:
- Diagnosing, treating, curing, or preventing a disease
- Prescription medications
- Transportation and lodging costs primarily for and essential to medical care
- Qualified long-term care (subject to limitations)
- Medical insurance including Social Security premiums
- Nursing home care if incurred primarily for medical care. In this case, the cost of lodging and meals are also deductible.
Still feeling generous? Make a qualified charitable distribution. "Direct payment of an RMD to a qualified charity can reduce or avoid income tax on the IRA distribution. A qualified charitable distribution can satisfy an individual’s RMD from his or her IRA," Minker concludes.
TD Ameritrade does not provide tax advice. We suggest you consult a tax professional regarding your personal situation.
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