Tax Strategies for Retirement

1. Withdrawal strategies.

Withdrawing from retirement accounts in the tax aware order helps to:

• Minimize taxes over your lifetime

• Preserve low tax brackets

• Avoid triggering Medicare surcharges or taxation on Social Security

Typical Smart Order:

1. Taxable Accounts (e.g., brokerage): Only gains are taxable, your return of principal is tax free. For example: You need $50,000 so you sell $50,000 of XYZ, you originally paid $30,000 for XYZ, so the $20,000 gain is what is taxed, the rest is not. If you held XYZ for more than a year you’ll pay capital gains tax rates which could be as low as 0 or 15% federally.

2. Tax-deferred Accounts (Traditional IRA, 401(k)): Withdraw carefully to manage income and avoid high Required Minimum Distributions (RMDs) later.

3. Tax-free Accounts (Roth IRA): Let these grow tax-free as long as possible; tap only as needed. It could be needed when you need a large sum of money, such as big home improvement projects.

Goal: Flatten the lifetime tax curve and avoid "tax cliffs" in later years.

2. Roth Conversions

What it is: A Roth conversion moves money from a Traditional IRA/401(k) to a Roth IRA, which then grows tax-free.

Tax Benefit:

• Pay taxes on the converted amount now, at a known rate.

• Avoid higher tax rates on withdrawals later.

• No RMDs from Roth IRAs.

When it's smart:

• In a low tax bracket now (e.g., early retirement before RMDs start).

• Want to leave tax-free assets to heirs.

• Expect future tax rates to rise.

Cautions:

• Increases current taxable income.

• Can push into a higher bracket or trigger Income-Related Monthly Adjustment Amount (IRMAA) (Medicare surcharge).

3. Asset Location

What it is: Strategically placing different types of investments in taxable, tax-deferred, or tax-free accounts to maximize after-tax returns.

Guidelines:

• Tax-inefficient assets (e.g., bonds, Real Estate Investment Trusts (REITs): Put in Traditional IRAs or 401(k)s.

• Tax-efficient assets (e.g., Stocks, index funds, Exchange Traded Funds (ETFs): Put in taxable accounts.

• High-growth assets: Put in Roth IRAs to maximize tax-free growth.

Why it matters: Taxes affect your returns and add up over time.

4. Charitable Giving

Qualified Charitable Distributions (QCDs)

What it is: A QCD allows individuals aged 70½ or older to transfer up to $100,000 per year directly from an IRA to a qualified charity, without the distribution being counted as taxable income.

Tax Benefit:

• Satisfies RMDs.

• Reduces Adjusted Gross Income (AGI), which can lower taxes on Social Security, Medicare premiums, and more.

• Get the tax benefit without itemizing deductions.

Key Rules:

• Must be made directly from the IRA to the charity.

• Cannot go to donor-advised funds or private foundations.

• Applies only to traditional IRAs (not 401(k)s or Roth IRAs).

Goal: Support causes while reducing the tax bill.

Tax-Smart Approaches:

• QCDs (as above)

• Donor-Advised Funds (DAFs): Bunch donations into one tax year to itemize and deduct, while giving over time.

• Appreciated Stock Donations: Avoid capital gains tax and deduct full value (if held >1 year).

• Charitable Remainder Trusts (CRTs): Provide income, then leave remainder to charity.

5. Gifting to Family or Heirs

Why: Shift wealth out of the estate during life to minimize estate taxes and help family sooner.

Tax-Smart Moves:

• Annual Gift Exclusion: Give up to $19,000 per recipient per year (2025) without filing a gift tax return.

• 529 College Savings Plans: Front-load 5 years of gifts (up to $95,000 in 2025).

• Appreciated Securities: Gift to family in lower tax brackets (but beware of the Kiddie Tax).

• Spousal Gifting: Unlimited between U.S. citizen spouses.

Final Note:

All these strategies should be coordinated with:

• Tax advisor (to model the tax impact)

• Financial planner (to integrate into retirement goals)

• Estate attorney (for legacy and trust planning)

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New York.