Category: Tax Planning

How to Reduce Taxes on Your Social Security Retirement Benefits

If you have already begun drawing Social Security, you might be surprised to learn taxes are owed on some of your benefits!  After all, you’ve been paying into the system via payroll taxes, so why is your benefit also taxable?   If you have yet to begin drawing Social Security yet, you can never say you weren’t told!  As a result, I’m often asked if there is a way to reduce taxes on your Social Security benefits.  This blog post will unpack how Social Security taxes work and how to reduce taxes on your benefits.  Make sure to join our newsletter so you don’t miss out on any of our retirement planning content (click here to subscribe!).  I hope you find this article helpful!

A brief history of Social Security

roosevelt mt rushmore

The Social Security Act was signed into law by President Roosevelt in 1935!  It was designed to pay retired workers over the age of 65.  However, life expectancy at birth was 58 for men and 62 for women!  Needless to say, there weren’t a huge number of retirees collecting benefits for very long.  As people began to live longer, several key provisions were added later.  One was increasing the benefits paid by inflation, also known as Cost of Living Adjustments (COLA).  Another was changing the benefits from a lump sum to monthly payments.  Ida Fuller was the first to receive a monthly benefit, and her first check was $22.54!  If you adjust this for inflation, that payment would be worth $420.15 today!  If you compare this to the average Social Security benefit paid to retirees of $1,782/month, those early payments were chump change! 

The Aging Population has Led to Challenges

According to data from 2021, life expectancy at birth is 73.5 years for men and 79.3 years for women!  In 2008, there were 39 million Americans over age 65.  By 2031, that number is projected to reach 75 million people!  We’ve all heard of the notion that older (more expensive) workers are being replaced by younger (less expensive) workers.   While taxable wages are going down and retirees collecting benefits are increasing, the result is a strain on the system.

Social Security benefits are actually funded by taxpayer dollars (of course).  If you look at a paystub, you will see FICA taxes withheld automatically.  FICA stands for Federal Insurance Contributions Act and is the tax revenue to pay for Social Security and Medicare Part A.  The Social Security portion is 6.2% for the employee and 6.2% for the employer, up to a maximum wage base of $160,200.  So, once you earn above $160,200 you likely will notice a “pay raise” by way of not paying into Social Security any longer.  Medicare is 1.45% up to $200,000, and then an additional 0.9% for wages above $200k (single filer) or $250k (married filing jointly).    

Up until 2021, FICA taxes have fully covered Social Security and Medicare benefits.  However, because of the challenges mentioned earlier, FICA taxes no longer cover the benefits paid out.  The good news is there is a Trust Fund for both Social Security and Medicare for this exact reason.  If there is a shortfall, the trust fund covers the gap.  The big challenge is if nothing changes, Social Security’s trust fund will be exhausted in 2034 and Medicare’s in 2031

How are the taxes on Social Security calculated?

The first concept to understand is that the % of your Social Security that will be taxable is based on your “combined income,” also known as provisional income.  If your combined income is below a certain threshold, your entire Social Security check will be tax-free!  If your combined income is between a certain threshold, up to 50% of your Social Security benefit will be taxable.  And finally, if your income is above the final threshold, up to 85% of your Social Security benefit will be taxable.  Here are the thresholds below.

how is social security taxed

How is “Combined Income” calculated?

The basic formula is to take your Adjusted Gross Income (NOT including Social Security), add any tax-exempt interest income, and then add in 50% of your Social Security benefits. 

If you are retired, you likely will have little to no earned income, unless you are working part-time.  Your adjusted gross income will be any interest income, capital gains (or losses), retirement account distributions, pensions, etc.  This is important to note because not all retirement account distributions are treated the same!  Additionally, capital gains can be offset by capital losses.  So even though your cash flow might exceed these numbers significantly, you still might be able to reduce or even eliminate how much tax you pay on your Social Security Income. 

Let’s look at two examples (both are Married Filing Jointly)

Client A has the following cash flows:

  • $40,000 of Social Security benefits
  • $50,000 Traditional IRA distribution (all taxable)
  • $10,000 of tax-free municipal interest income

The combined income in this scenario is $80,000.

Half of Social Security ($20,000) + $50,000 IRA distribution + $10,000 municipal bond income = $80k.

Notice how the municipal bond income is added back into the calculation!  Many clients try to reduce taxes on their bond interest payments by investing in municipal bonds.  However, it’s important to note how this interest income might impact other areas of tax planning

In this scenario, 85%  of their Social Security benefit will be taxable. 

The first $32,000 of income doesn’t trigger any Social Security taxes. 

The next $12,000 will include 50% ($6,000)

And finally, the amount over $44,000 ($36,000) includes 85% (85% * $36,000 = $30,600).

$6,000 + $30,600 = $36,600

If you divide $36,600 by the $40,000 Social Security benefit, it gives you 91.5%.  However, a maximum of up to 85% of the Social Security benefit is taxable, so in this case, they are capped at 85% and $34,000 will be their “taxable Social Security” amount.

Client B has the following cash flows:

  • $40,000 Social Security Income
  • $50,000 Roth IRA distribution
  • $4,000 Interest Income

Client B’s provisional income is only $24,000!  

Half of Social Security ($20k) + $0 retirement account distributions + $4,000 interest income = $24,000

As you can see, the Social Security benefits are identical to client A.  However, the $50,000 retirement account distribution is from a Roth account, and in this case, it was a tax-free distribution.  And finally, the interest income was way down because the client elected to reduce their bond allocations in their taxable account and instead owned them inside of their IRAs (which is not taxable). 

So despite having essentially identical cash flows, Client B enjoys 100% of their Social Security check being tax-free!  In other words, they have reduced their taxable income by $34,000 compared to client A!

A huge challenge arises for clients who are under the max 85% threshold.  Each dollar that is added to their retirement income will increase how much Social Security is taxed!  If someone is in the 50% range and they take an additional $1,000 from a Traditional IRA, they will technically increase their adjusted gross income by $1,500!  $1,000 for the IRA distribution and $500 for taxable Social Security income!

helped retired couple reduces social security taxes

What can you do about reducing taxes on Social Security?

So while you shouldn’t let the tail wag the dog, you should absolutely begin mapping out how you can make your retirement income plan as tax efficient as possible!  Here are a few ways to reduce your “combined income” and thus reduce your taxes on Social Security payments.

Roth Conversions

Simply put, a Roth conversion allows you to “convert” all or a portion of your traditional IRA/401k/403b to a Roth account.  Of course, you will have to pay taxes on the amount converted, but all of the growth and earnings can now be tax-free! 

This is perhaps one of the most impactful strategies you can incorporate!  However, you must start this strategy at the right time!  If you are still employed and perhaps at the peak of your earnings, you may not benefit from Roth conversions…yet.  However, if you recently retired and have yet to begin the Required Minimum Distributions (RMDs), you might find it to be a valuable strategy if you execute it properly.  

One of our most recent podcast episodes is about this topic; you can listen to it here.

Avoid the RMD Trap!

The RMD trap is simply the tax trap that most people with Traditional IRAs or 401ks run into.  In the early years of retirement, your RMD starts out quite low because it’s based on your life expectancy according to the IRS.  However, each year the amount you are required to withdraw increases.  By the time you are in your 80s and even 90s, the amount you are taking out could exceed what you need for cash flows!  But despite needing it for income or not, you have to withdraw it to avoid the dreaded penalties, and this could push you into higher tax brackets later in retirement.  And of course, this could also increase the taxation of your Social Security check

Roth conversions help with this, but it could also help to try to even out the distributions!  Instead of just waiting for the RMDs to balloon, perhaps you devise a better withdrawal strategy to target a certain tax bracket threshold throughout your retirement.

Asset Location strategies

You may have heard of the term “Asset Allocation,” which involves careful selection of asset classes that align with a portfolio’s objectives.  In essence, what % of stocks, bonds, real estate, and cash does the portfolio hold?  Asset Location involves selecting which accounts will own those asset classes in order to maximize tax efficiency and time horizon. 

When we looked at the Social Security examples earlier, you probably noticed Client B had less taxable interest income.  This is because they elected to reduce the amount of fixed income in their “taxable” account, and moved those assets into their IRAs. 

Alternatively, you might have a longer time horizon with some of your accounts, like a Roth IRA.  Given Roth’s tax-free nature and the NO RMDs, this account is a great “long-term” bucket for retirement income planning.  As a result, you might elect to have this account ultra-aggressive and not worry much about capital gains exposure, etc. 

You should take advantage of the tax characteristics of different “buckets” for retirement income planning.  Not all of your investment accounts should look identical in that sense.

Tax Loss Harvesting

Perhaps one of the most UNDERRATED strategies is tax loss harvesting.  Oftentimes when the market is down, people bury their heads in the sand hoping that things will improve one day.  And this is certainly better than selling out and moving to cash!  However, there is one step many people miss: realizing losses when the markets are down.  These losses can then be used to offset capital gains, and even reduce your ordinary income! 

I oftentimes hear pushback that people don’t want to offload investments at a loss because they were trained to “buy low and sell high.”  This is a great point, but with tax loss harvesting, after the loss is realized, you then turn around and replace the investment you sold with something similar, but not “substantially identical.”  That way, you avoid the Wash-Sale rule so you can recognize the tax loss, but you stay invested by reallocating funds into the market. 

Episode 19 of The Planning for Retirement Podcast is all about this topic and you can listen to it here

Qualified Charitable Distributions

qualified charitable distributions

Okay, so you missed the boat on Roth conversions, and you are already taking RMDs from your accounts.  Qualified Charitable Distributions, or QCDs, allow for up to $100,000/year to be donated to charity (qualified 501c3) without recognizing any taxable income to the owner!  Of course, the charity also receives the donation tax-free, so it’s a win-win!  I oftentimes hear of clients donating to charity, but they are itemizing their deductions.  Almost 90% of taxpayers are itemizing because of the Tax Cuts and Jobs Act of 2017.   QCDs can be utilized regardless if you are taking the standard deduction or not!  And the most powerful aspect of the QCD is that it will reduce your RMD dollar for dollar up to $100k. 

Let’s say your RMD for 2023 is $50k.  You typically donate $10k/year to your church but you write a check or donate cash.  At the end of most tax years, you end up taking the standard deduction anyways, so donating to charity doesn’t hurt or help you. 

Now that you’ve learned what a QCD is, you go to the custodian of your IRA and tell them you want to set up a QCD for your church.  You fill out a QCD form, and $10k will come out of your IRA directly to your Church (or whatever charities you donate to).  Now, your RMD is only $40k for 2023 instead of $50k!  In essence, it’s better than a tax deduction because it was never recognized as income in the first place! 

Two important footnotes are the QCD has to come from an IRA and the owner must be at least 70.5 years old!  It cannot come out of a 401k or any other qualified plan! 

We wrote an entire article on QCDs (and DAFs) that you can read here.

Final Thoughts

Retirement Planning is so much more than simply what is your investment asset allocation.  Each account you own has different tax characteristics, and the movement of money within or between those accounts also has tax consequences.  Instead of winging it, you could save tens or even hundreds of thousands of dollars in taxes in retirement if you are proactive.  However, the tax code is constantly changing!  In fact, the Tax Cuts and Jobs Act of 2017 is expiring after 2025, so unless something changes, tax rates are going up for most taxpayers.  Additionally, the markets are beginning to recover, so strategies like tax loss harvesting or Roth conversions become less impactful.  But, there is still plenty of time and opportunity!   

Thanks for reading and I hope you learned something valuable.  Make sure to SUBSCRIBE to our newsletter to receive updates on me personally, professionally, and of course, content to help you achieve financial independence!  CLICK on the “keep me up to speed” button below.


What are the rules for Required Minimum Distributions?

Congratulations!  Lots of blood, sweat, and tears went into a successful career, and you have saved enough to start thinking about when to retire.  If you’ve been saving into a 401k, 403b, or another retirement plan through work, you’ve probably heard of  Required Minimum Distributions or “RMDs.”  You might be wondering;

“What are the rules for required minimum distributions?” 

“How do RMDs impact my taxes? 

Or, “What can I do now to prepare for RMDs?”  

This article is for you!  We’ll unpack all of this and provide REAL-LIFE action items to help you plan for RMDs and save in taxes!

What are RMDs and when do they start?

Simply put, RMDs are the IRS’s way of saying, “the party is over.”  Or in this case, the tax party is over! 

When you contributed to your 401k, IRA, or 403b, you likely took advantage of a generous tax deduction up front and have never paid taxes year over year on earnings.  Pretty powerful, right?

The IRS has been patiently waiting for you to start withdrawals, and RMDs are their way of starting to collect their tax revenue.  

Starting in 2023, the RMD age, or “beginning date,” is the year in which you turn 73 (for individuals born before 1960).  For those born in 1960 or later, the beginning date is the year you turn 75.

Just a few short years ago, the beginning date was the year you turned 70 ½.  The SECURE Act of 2019 pushed the RMD age back to 72, and the SECURE Act 2.0 (just passed in December 2022) pushed it back even further.  With many retirees living well into their 90s, that’s potentially 20+ years of RMDs!

These qualified plans have such powerful tax advantages because the growth year over year is not taxable!  This allows for compounding interest to avoid tax drags altogether, which is unique in the investment world.   However, there is a reason why our clients’ largest expense during retirement is TAXES!  Our job is to minimize taxes, legally, as much as possible.  Part of that job is to minimize the tax impact of RMDs in retirement.+

Changes to required minimum distributions from secure act 2.0

How are RMDs calculated?

The IRS has life expectancy tables that are updated (not so frequently), and each age has an assigned “life expectancy factor.”  Once you reach your beginning date, the account balance at the previous year’s close (December 31st) is divided by the life expectancy factor in the IRS tables. 


You have a $1,000,000 IRA balance as of December 31st of 2022.

Assuming you turn 75 in 2023 and you use the Uniform Lifetime Table (more on this in a moment), your life expectancy factor would be 24.6. 

To calculate the RMD for 2023, you would divide $1,000,000 by 24.6, which would equate to $40,650.40.

There are three types of life expectancy tables.  The Uniform Life Expectancy table (used above) is for single or married account owners.  However, if you are married, your spouse is the sole beneficiary of your account, AND is more than 10 years younger than you, you can use the Joint Life and Last Survivor Life Expectancy Table.  

The “Single Life” expectancy is for beneficiaries of IRAs that were not the spouse and inherited the account before January 1st of 2020.  For account owners who have inherited IRAs or other retirement accounts beginning in 2020, the new 10-year rule applies, which we will discuss shortly.

The older you get the higher the rate of withdrawal gets.  By the time you reach 80, the distribution percentage is close to 5%/year!  At 85, it’s 6.25%! 

An RMD for a $1,000,000 IRA at age 85 is  $62,500! 

If you add in Social Security income, perhaps a pension, and other investment income, you can see how this could create a tax burden during the RMD phase.  The IRS does not care if you need the income, they just want their tax revenue.  And not only will your taxable income in retirement go up, but could impact how much Social Security is taxed and how much you are paying for Medicare premiums!

If you miss an RMD, there are penalties.  The SECURE Act 2.0 changed the penalty to 25% from 50%, and that applies to the amount you failed to withdraw.  Using our example above with a $40,650.40 RMD, a 25% penalty would equate to $10,162.60 assuming you withdrew nothing!

Needless to say, make sure you satisfy this important rule for required minimum distributions or pay the price.  

The first RMD can be delayed until April 1st of the following year!

RMDs need to be satisfied by December 31st each year.   Some of our clients elect to take the RMD monthly in 12 equal payments; others elect quarterly.  And some take it as a lump sum.  The decision is cash flow driven and how much you need the RMD for income (or not).  There is one exception that applies to your FIRST RMD.  The first required minimum distribution can be delayed until April 1st of the following year. 

Let’s say you turn 73 in the year 2024, which would make 2024 your beginning date.  However, you also plan to retire in 2024 and might still have high wages to report for that tax year.  In 2025, you will be fully retired and will have ZERO wages, so you decide you want to take advantage of delaying the first RMD until 2025.   In this scenario, you would take the 2024 distribution by April 1st (of 2025) and of course the 2025 distribution by December 31st!  In this scenario, you have two RMDs on your 2025 tax return, but your overall income perhaps is still lower because of no W2!

Are there RMDs on my current employer plan?

If you are still actively employed and have a qualified plan you are participating in, you can avoid RMDs from those plans only.  Let’s say you plan to work until 75, and you have a large 401k with your current employer and an IRA from previous retirement plans.  You will still be required to make an RMD from your IRA, but you can avoid the RMD on your 401k altogether.  Once you are officially separated from service, that will trigger the “beginning date” for that 401k plan. 

It’s also important to note that separation from service triggers the “beginning date” for that 401k.  So, assuming you deferred RMDs in your current 401k plan, and retire at 75, you can still take advantage of deferring the first RMD until April 1st following the year you separated from service.

Finally, this rule does NOT apply to Solo 401ks or SEP IRAs.  These plans are for self-employed individuals, and RMDs can’t be delayed simply because they are still working.

Can I aggregate my RMDs into one plan?

You might be wondering if you have multiple retirement plans, can you just pull the RMDs from one account? 

My favorite answer is, “it depends.”

If the multiple retirement plans have identical plan types (perhaps they are all 401ks or all 403bs), then “yes, you can aggregate the RMDs.”   If there are different plan types, like one IRA and one 401k, those plans each have their own RMD and must be satisfied separately.   Let’s look at two examples:


Scenario 1:  Joe has two IRAs, each with RMDs:

IRA RMD #1:  $10,000

IRA RMD #2:  $25,000

Total IRA RMD = $35,000


He can satisfy the entire $35,000 from either or both accounts. 


Scenario 2:  Joe has one IRA and one 401k each with RMDs:

IRA RMD #1:  $10,000

401k RMD #2:  $20,000

Each RMD would need to be satisfied separately because they are not identical account types. 

SECURE Act’s elimination of the Stretch IRA for (MOST) beneficiaries

stretch IRA elimination

In January 2020, the SECURE Act of 2019 went into law.  Part of the plan to pay for the bill was to accelerate distributions for beneficiaries of IRAs and 401k plans. 

Under the previous law, a beneficiary other than the spouse could “stretch” the IRA based on THEIR life expectancy.  Assuming the non-spouse beneficiary was much younger (like an adult child), the RMD would be reduced significantly after the original owner’s death.  This is when the Single Life Expectancy table is used, as we alluded to earlier.  

Let’s look at an example: 

An original account holder has a $1mm IRA and is 80 years old.  Their RMD would be $1,000,000 / 20.2 = $44,504.96.  Before 2020, if that account owner passed away and their 55-year-old daughter inherited the account, her RMD would be $31,645.57.  That’s a reduction of almost $13,000 of taxable income!  In essence, it allowed the new owner to “stretch out” the distributions over a much longer period of time and thus preserving the tax-deferred status for longer.

The SECURE Act of 2019 eliminated the stretch IRA for MOST beneficiaries.  I wrote about this in a previous post, “The Tax Trap of Traditional 401ks and IRAs,” but most beneficiaries other than the spouse will follow the “10-year rule.”

What is the 10-year rule?

The 10-year rule states that a retirement account must be fully liquidated by the end of the 10th year following the owner’s death.  The exception to the 10-year rule is for those who are “eligible designated beneficiaries.”  These individuals are essentially a spouse, a beneficiary who is disabled or chronically ill, or a beneficiary who is fewer than 10 years younger than the IRA owner. 

Everyone else will follow the 10-year rule.

If the IRA owner passed away on or after the beginning date, RMDs must continue during years 1-9, and then the full balance must be liquidated in year 10.  If the IRA owner passed away before their beginning date, there are no RMDs until year 10, when the account needs to be fully liquidated.

It might be tempting to stretch the 10-year rule until the 10th year, but this would result in significant taxes owed that year.  Instead, you might consider taking somewhat equal distributions in years 1-9 and distributing the remaining account balance in year 10 to avoid a huge tax bill. 

As you can see by the (overly simplified) chart below, this has significantly increased the size of distributions required after the account owner’s death and ultimately results in higher taxes.

What can you do to minimize the tax impact of RMDs?

If you are like many of our clients, the bulk of your retirement savings might be in tax-deferred 401ks or IRAs.   However, newer plans like Roth IRAs and other Roth retirement plans have NO RMDs!  Therefore, one way to minimize the RMD impact is to increase the proportion of Roth accounts on your balance sheet.  There are two ways to do this:

  1. If you are still working, change the contribution allocation to Roth vs. Traditional (401ks, 403bs, TSPs, etc).  If your employer does not have a Roth option, you might consider a Roth IRA. 
  2. If you are retired or perhaps not contributing to a retirement plan, you could consider Roth conversions. This allows for money to be moved from tax-deferred accounts to tax-free accounts by paying taxes on the amount converted. 

Why would I want to pay more taxes now?

Perhaps you believe your tax bracket will go up due to RMDs.  Maybe you saved diligently into 401ks and IRAs and your RMD will be high enough to push you into the next tax bracket.  

Also, healthcare is a big expense in retirement!  Many people don’t realize that your Modified Adjusted Gross Income (“MAGI”) will impact how much you pay in Medicare Part B and D premiums (known as “IRMAA”)!   The base premium for Medicare Part B is $164.90, but this can increase as high as $560.50 depending on your MAGI!  Multiply this by 2 for Married Couples and we are talking over $12k/year in premiums alone!

Therefore, you might consider taking small bites at the apple now (pay some additional taxes now), so you don’t have a huge tax drag when RMDs kick in. 

Consider taking advantage of "Qualified Charitable Distributions" or QCDs

This is perhaps my favorite tax strategy for retireesQCDs allow for up to $100,000 to be donated to a qualified charity from your IRA.  You have to be at least 70.5 years old, and it has to come from YOUR IRA (not an inherited IRA).  This also means you cannot use 401ks or 403bs for QCDs! 

While you can start this strategy at 70.5, this has the most impact on those already taking RMDs. 

Because of the increase in the standard deduction, the majority of taxpayers are NOT itemizing deductions.  If you’re not itemizing deductions, the gift you made to your favorite charity is NOT deductible!  Instead of donating cash, a QCD will allow you to use some (or all) of your RMD to contribute to your favorite charity (or charities).  The best part; is there is NO impact on itemizing or using the standard deduction!  The amount donated via QCD reduces your RMD dollar for dollar (up to $100,000), which is in essence BETTER than a tax deduction!  Let’s look at how this works.

Bill’s RMD for 2023 is $50,000. 

Bill loves donating to his local animal shelter which is a qualified 501(c)(3).  He typically sends a check for $5,000, but he does not have enough deductions to itemize on his tax return.  Instead of sending a check, Bill fills out a QCD form with Charles Schwab (where his IRA is) and tells them to send $5k from his IRA directly to the shelter.  The QCD is processed, and now Bill’s remaining RMD is only $45,000 for 2023!  See, better than a tax deduction! 

It’s important to note that the charity has to be a US 501(c)(3) to be eligible for a QCD, and this excludes Donor Advised Funds and certain charities.  

Action Items

RMDs will likely always be a part of our tax code.  As you can see, however, the rules are changing frequently!  Instead of being reactive, begin planning for how to deal with your RMDs well before you start them! 

Here are some action items and questions to consider:

1.  Run a projection for what your RMD will be at your beginning date

2.  Does your RMD provide a surplus of income?  Or, do you need your RMD to maintain your retirement lifestyle?  

3.  If your RMD provides a surplus of income, consider increasing Roth contributions and reducing Pre-tax contributions.    Or, consider converting some of your pre-tax balance to Roth when the timing is right.  Typically a great time to look at this is when you retire and have a window of time (let’s say 4-5 years) before starting RMDs!

4.  If you are already taking RMDs, determine if QCDs are a viable option for you to consider 

5.  If leaving a financial legacy is important, consider the tax implications of leaving retirement accounts to the next generation.  Are your children in higher tax brackets?  If so, you might want to consider the impact the 10-year rule will have on their tax bill.  

6.  Do you believe your tax rate (or perhaps tax rates in general) will be higher or lower in the future?

It’s important to have a plan and consult with a financial professional who understands taxes in retirement!  If you have questions about how to address your RMD strategy, reach out to us and schedule an initial “Zoom” meeting!   We would love to get to know you and learn how we can help with your retirement journey.  

And as always, make sure to subscribe to our newsletter to stay up to date with all of our latest retirement planning content!

Until next time, thanks for reading!

2022 Market Recap and Opportunities for 2023

As we start 2023, it’s important for us to take some time to reflect on this past year before turning the page.  

That way, we can bring in the new year with a fresh perspective on where the opportunities are. 

In addition to investment opportunities, the SECURE Act 2.0 passed in December, which brings about some exciting tax and retirement planning strategies

Let’s start with a recap of 2022!

2022 Was a Tough Year for Investors

We started out 2022 with record-high inflation at 7.5%, but the Fed Funds rate was still at 0%.   In order to respond to the COVID-19 pandemic in 2020, the Feds not only cut interest rates but also injected mass amounts of stimulus into the economy.  The more money in people’s hands, the more inflation you get.  Additionally, unemployment skyrocketed in the short-term following temporary layoffs in 2020, but those workers were largely seasonal and got their jobs back later in 2020 and early 2021.  Many worked remotely and never skipped a beat.  As a result of record stimulus coupled with historically low unemployment, inflation began to persist in the summer of 2021.  Instead of the Fed acting at that point (potentially increasing rates and/or reducing their balance sheet), they insisted that inflation was transitory and that it would be short-lived.  After several months of PERSISTENT inflation, the Fed announced its strategy for 2022:  Rate Hikes and Quantitative Tightening (reducing the assets on the Fed’s balance sheet). 

Meanwhile, Russia invades Ukraine, which is of course a tragedy simply due to the unnecessary loss of life.  Financially, this sent an energy shortage throughout Europe and Asia that impacted the global economy (and fuels MORE inflation).

And finally, the second largest economy in the world, China, continued its improbable journey to a zero-tolerance policy for COVID-19.

In essence, the biggest global economies in the world each had their own economic headwinds to deal with, which has now led us to where we are today.

After raising rates by 4.25% in 2022, the Fed feels like its work is starting to pay off.  However, Jay Powell believes more work needs to be done and needs “substantially more evidence” that inflation is abating.  Therefore, we should expect to see more rate hikes this year, but not as steep.  This year, the market is pricing in two 25 basis point rate hikes which will bring the Fed funds target to nearly 5%.      

fed rate hikes in 2022

The ongoing conflict in Ukraine as well as China’s rocky start to “reopening” will not help the fight against inflation.  Additionally, unemployment FELL in December to 3.5% from 3.6% in November.  Wage growth also remains above historical averages at 5.8% given the tight labor market. 

Therefore, despite further rate hikes, inflation might remain above the Fed’s goal of 2% for quite some time.  

For some positive news of 2022, let’s remember that the pandemic has brought about a tough 2 1/2 years.  But finally, it looks like everyone is moving forward into the new “post-pandemic normal.”  

Asset Class Returns 2008 - 2022

Here is a summary of the asset class returns from 2008 – 2022.  For your reference, here is some clarification on some of the acronyms:

  • “Comdty.” = commodities 
  • “EM Equity” = emerging markets
  • “DM Equity” – developed markets (excluding US) 
  • “Asset Alloc.” =  60% equity / 40% fixed income portfolio 


2022 market returns

2022 was a tough year.  All of the major asset classes were negative, and mostly by double digits.  However, looking at the past 15 years since 2008, a 60/40 portfolio (“asset alloc.”) returned 6.1%/year, and Large Cap US Stocks returned close to 9%/year!  I would argue the last 15 years the market has outperformed its historical average, so it’s not unreasonable to think we might have a down year (or two).  After all, when we have a long-term investment strategy, we are signing for up occasional volatility.  However, the only way to guarantee not getting to your destination is by bailing out of your long-term plan. 

Despite these factors, here are the opportunities we see for 2023 and beyond.  Additionally, the SECURE Act 2.0 passed in December of 2022 and brings about new tax planning opportunities for retirees and pre-retirees.  We’ll discuss all of this below.

Yield is Back in Fixed Income

Since 2008, we have seen rate cuts to historic lows, which remained unnecessarily low for too long.  As a result, yields on bonds were paying next to nothing, unless you were willing to take on substantial risk.  As a result, you were lucky to earn 2% on an investment-grade portfolio over the last decade.  Now that rates have skyrocketed, we are seeing yields on bonds push past the 4% and even the 5% range!  At the beginning of 2022, I talked about the risk of rate hikes on existing bond portfolios.  For this reason (among others), we elected to stay short term in duration within the fixed income positions for our clients.  This didn’t eliminate the volatility within bonds, but it reduced the price risk substantially and paid off well.  Now that these bonds are maturing, we have an opportunity to reinvest at the highest rates we’ve seen since before the global financial crisis in 2008. 

For retirees out there, this is a great opportunity to take advantage of purchasing bonds that can not only act as a stabilizer from equity volatility but provide meaningful returns for retirement income.  After all, inflation is expected to abate, which could lead to an intermediate to long-term term bond strategy outpacing inflation by 2% or even 3% per year!

I wrote about 4 bear market income strategies in my last article where I also discussed the value of a bond ladder as part of a retirement income plan.  Given the expectation that rates are likely not to remain this high for very long, the next 1-3 years will be a great opportunity to add duration and yield to your fixed-income portfolios. 

I might add that shorter-term bonds are yielding higher coupon payments than longer-term bonds.  As of today, the 2-year treasury is yielding 4.157%, compared to the 10-year treasury yielding only 3.449%.  This means that the market is pricing in rate decreases over the next few years.  As we mentioned earlier, bond prices go down when rates go up.  The opposite is true when rates go down, bond prices go up.  This means that fixed-income investors will not only benefit from higher yields but might also benefit from potential appreciation if/when bond prices do go up. 

bond yields in 2022

Value Stocks vs. Growth Stocks

With all of the talk about how great yields are on bonds and how poorly stocks did in 2022, we love the outlook for stocks over the next 5 years.  The question is, what kind of stocks will outperform?  Well, being an advocate for a well-diversified portfolio, we won’t be taking any big bets on any one asset class.  However, we talked about overweighting toward value stocks in 2022, and we think the same for 2023.  

Companies that rely on leverage for growth typically reap the rewards of the low-rate environment we saw since the Great Recession.  Therefore, the “growth” sectors within equities outperformed for much of the last decade.  Towards the end of 2021, we talked about the risk of being overexposed to growth-oriented stocks (tech stocks, consumer cyclical stocks) during a rising rate environment.  Just think about it; the more expensive debt becomes, the tougher it is for these companies to borrow at the pace they need for growth. 

Instead, we liked value stocks to be overweight in the portfolio, as investors would flock to safety during volatile times (think dividend-oriented, cash-flow healthy companies).

Growth stocks took the biggest hit in 2022 and lost about 30%.  Some of the biggest names in tech were down even more.

  • Google (GOOG):  -39.1%
  • Amazon (AMZN):  -49.6%
  • Tesla (TSLA):  -65%
  • Facebook (META): – 65%
  • Netflix (NFLX): -50%

On the contrary, value stocks were down only 6% in 2022. 

We do believe there is more volatility ahead, as corporate earnings might disappoint in the first half of 2023.  However, when stocks take a big hit like this, it’s a buying opportunity, NOT a selling opportunity.  As we re-balanced portfolios in 2022 and at the beginning of 2023, we were buying stocks, not selling!  And if history is an indicator, after we hit bear markets, the performance of stocks tends to be very promising in the years ahead.  After all, bear markets typically experience a -37% decline, but bull markets experience a 209% increase, on average!  

value stocks vs growth stocks in 2022

Don't ignore International Stocks!

International stocks have been underperforming relative to US stocks for over a decade.  However, international companies have looked relatively cheap for quite some time now.  These stocks were set to outperform in 2020 until COVID-19 shut down the global economy.  International stocks have taken a bigger hit since the pandemic but outperformed US stocks in the second half of 2022.  With cheap valuations, a stronger outlook for growth relative to the US, and a strong dollar, it’s important NOT to ignore international exposure within your portfolio.  For our clients, we are focusing on quality companies with steady cash flows and strong balance sheets, very similar to the story for the US sectors.  Additionally, we are limiting our exposure to companies that are owned by foreign governments, as they create additional geopolitical risk.

Of course, there are still significant risks with China’s reopening, as well as the Russian invasion of Ukraine.  These factors could certainly create lots of volatility for the asset class, which is why US stocks will continue to remain the majority asset class within our equity portfolios. 

For you historians out there, the chart below shows international stocks outperformed much of the 70s and 80s during hyperinflation.  I’m not suggesting this will be the same story, but a prudent investment strategy will certainly incorporate international stocks going forward.  

don't ignore international stocks

Bottom Line

Stocks and bonds both declining at a double-digit pace is unprecedented.  However, staying diversified and disciplined served our clients well in 2022 and will serve them even better when things begin to recover.

It’s important to always start with “why.”  Why are you investing?  

For our clients, it starts with a financial plan which includes their personalized goals, risk tolerance, and financial assets.  

Each investment strategy is tailored to its goals and involves a process to stay on track for those goals.  It’s extremely dangerous to try to guess or time the market, as it’s virtually impossible to do consistently over time. 

SECURE Act 2.0 Highlights

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in 2019 and went into effect on January 1st of 2020.  The SECURE Act 2.0 was officially passed in December 2022.  Some aspects go into effect in 2023, whereas others will go into effect in the years to come.  We will focus on the SECURE Act 2.0 and the major changes we believe will impact retirees and pre-retirees

Changes in Required Minimum Distributions

Required Minimum Distributions, or RMDs, is the amount required to be taken out of a qualified retirement plan once the beginning date starts.  Before the SECURE Act of 2019 was passed, the RMD beginning date was the year in which you turned 70 1/2 .  However, for those who had not yet turned 70 ½ as of January 1st 2020, the new RMD beginning date was the year in which you turned 72. 

The SECURE Act 2.0 now pushes the beginning date back further.  The table below illustrates the beginning date based on your year of birth.

Changes to required minimum distributions from secure act 2.0

The amount required for the distribution is based on the IRS life expectancy table.  For most participants, the Uniform Lifetime Table will be used.  If your spouse is more than 10 years younger, you can use what is called the “Joint Life Expectancy Table.”  There is also a single life expectancy for stretch IRAs (no longer allowed after 2020).

For illustrative purposes, let’s take a look at the Uniform Lifetime Table below, which also shows the corresponding percentage and dollar amount required to be taken from a $1,000,000 retirement account.

As you can see, for a 72-year-old, the account balance is divided by 27.4 (the divisor balance), which is equal to $36,496.35 (or roughly 3.65% of the account balance). 

You will notice the RMD goes up over time.  This is because there are fewer years of life expectancy remaining.  By the time a retiree reaches 80, the RMD is approximately 5% of the portfolio. 

Uniform Lifetime Table


Divisor Balance

% of Account

RMD for a $1,000,000 retirement account




 $                    34,364.26




 $                    35,460.99




 $                    36,496.35




 $                    37,735.85




 $                    39,215.69




 $                    40,650.41




 $                    42,194.09




 $                    43,668.12




 $                    45,454.55




 $                    47,393.36




 $                    49,504.95




 $                    51,546.39




 $                    54,054.05




 $                    56,497.18




 $                    59,523.81




 $                    62,500.00




 $                    65,789.47




 $                    69,444.44




 $                    72,992.70




 $                    77,519.38




 $                    81,967.21

For those of you turning 72 in 2023, you were probably planning to have your beginning date start this year.  However, this new legislation is in effect NOW, so your beginning date is 2024 when you turn 73!  Happy Birthday to those born in 1951!

The next group of individuals born in 1960 or later will have a beginning date of the year they turn 75. 

For the first RMD only, you can delay the distribution until April 1st of the following year. 

For example, you turn 73 in 2024 (born in 1951).  You can either take your first RMD in the calendar year of 2024 OR take that RMD by April 1st of 2025.  Just remember, if you decide to delay until April 1st, you will have TWO RMD’s for 2025 (one for 2024, and one for 2025).  However, this is helpful if your taxable income will drop substantially after your beginning date due to retirement or other reasons. 

Planning opportunities for RMDs

First and foremost, SECURE Act 2.0 gives account owners more time until they are required to start taking RMDs.  For many of you, you might be dreading RMDs as you might not NEED those distributions for income.  Perhaps your Social Security, Pension, and other investment income is more than enough to live your lifestyle.  Therefore, RMDs are more of a tax liability than anything else. 

For some, considering a Roth conversion strategy could be advantageous. 

Consider someone who is retiring at 62, and their earned income goes to 0.  Perhaps they plan to live on their investment assets until reaching 70 (their Latest Retirement Age for maximum Social Security benefits).  Assuming the beginning date is the year in which they turn 75, they have 13 years of potentially low income. 

Therefore, instead of continuing to defer their retirement account balances until 75, one might consider converting portions of those existing tax-deferred account balances for the next 13 years.  Yes, a Roth conversion would trigger taxes now based on the amount converted, but this also reduces the calculation for the RMD each year.  Roth IRAs do not have RMDs, and distributions from Roth IRAs are tax-free (assuming they are qualified).  Therefore, this could result in tax savings beginning at age 75, and could potentially last for 20+ years based on one’s life expectancy.   I wrote an article on Roth conversions and if you should consider them that you can read here.

Another positive change is the elimination of the RMD from Roth 401ks and other Roth-qualified retirement plans.  In the past, ONLY Roth IRAs were excluded from RMD calculations.  Beginning in 2024, qualified plans with Roth balances will NOT be required to take an RMD. 

Qualified Charitable Distributions (QCDs)

QCDs are a great tool for those over the age of 70 ½ and are charitably minded.   For 2023, the limit for a QCD is still $100,000, which means you can gift up to that amount from your Traditional IRA to a charity without paying taxes.  However, this limit will begin to index with inflation beginning in 2024 (finally!).  The initial $100,000 limit was set in 2001, so it’s about time they began to increase the amount allowed.

This works extremely well if you are already taking RMDs, as that income is not counted towards your Adjusted Gross Income.  Instead, it’s an above-the-line deduction regardless if you itemize or take the standard deduction. 

Example:  Susan typically donates $10,000/year to her favorite animal shelter, which operates as a 501(c)3 charity.  However, her total itemized deductions don’t exceed the standard deduction for her and her spouse, which is $27,700 for 2023.  Therefore, she technically does not receive any tax incentive for donating the $10,000.  Last year, she turned 72, so she now has an RMD of $50,000 in 2023.  Instead of taking the $50,000 as income, paying taxes, and writing a $10k check to the animal shelter, she elects to do a $10k QCD.  The QCD form is filled out through the custodian, and the custodian will write the check directly to the charity.  Now, her RMD is only $40,000 (instead of the full $50k).  The net result is a reduction in taxable income of $10,000, and the standard deduction is still in effect! Win-win!

There is a provision in SECURE Act 2.0 that allows for a $50,000 one-time contribution to fund a Charitable Remainder Trust (CRUT or CRAT).  Most individuals funding Charitable Remainder Trusts are funding them with much larger increments, as essentially you are giving away those assets to a charity, in exchange for a lifetime income and a generous tax deduction.  In most cases, $50,000 is not going to provide very much in the way of lifetime income, and that asset is no longer available on the balance sheet. 

Therefore, QCDs are mostly unchanged with the exception of inflation adjustments, but keep in mind the Charitable Trust strategy as it could come into play for some charitably minded individuals.

Roth SIMPLE IRAs and Roth SEP IRAs

Traditionally, these small business retirement plans could only be funded with pre-tax dollars.  With the SECURE Act 2.0, these businesses can now allow for Roth contributions for both SIMPLE IRAs and SEP IRAs.  This will be effective immediately starting in 2023.  However, I’m expecting some challenges and delays from the custodians of these accounts given the need to update forms, processes, and procedures. 

Just remember, a ROTH contribution into a SEP or SIMPLE IRA is non deductible, but can benefit from tax-free growth.  A Traditional (pre-tax) contribution into a SEP or SIMPLE IRA is deductible and grows tax deferred. 

The driver of what kind of contribution to make is based on what your current tax bracket is vs. what it might be in retirement (any crystal balls?).  If you are in a high tax bracket today and don’t plan to be during retirement, you might benefit from Traditional SEP contributions that are deductible.  If you are tax neutral or you might be in a higher tax bracket in retirement, you might benefit from tax-free growth (Roth contributions).  

If you have no idea, perhaps you should consider contacting a fiduciary financial planner and/or tax professional.   (or just split it 50/50!)

529 Rollovers to a Roth IRA

Yes, you read this correctly!  Parents tell me all the time that they are worried about overfunding their child’s 529 because their kid is going to be the next Mark Zuckerberg, drop out of college and become a billionaire.  So, what about those dollars that are left inside the 529? 

Most parents (and grandparents) will just liquidate the account and pay taxes and/or penalties, or simply let the account sit there indefinitely.  Beginning in 2024, 529 plans that have unused funds can be rolled over into a Roth IRA.  However, it’s NOT too good to be true as there are hoops you need to jump through.

  1. The Roth IRA receiving the rollover must be the same beneficiary as the 529 plan
  2. The 529 plan must be open for at least 15 years
  3. Contributions to the 529 within the last 5 years, and earnings on those contributions, are ineligible for rollover
  4. The annual limit for how much can be moved to the Roth IRA is the same as Roth IRA contribution limits (not including contributions directly made to the Roth IRA)
  5. The lifetime maximum that can be moved from a 529 plan to a Roth IRA is $35,000

If your child is the beneficiary, this would mean you would have to rollover their 529 balance to a Roth IRA in THEIR name.  However, could the rule allow for a change of beneficiary to name either you or your spouse, then proceed with a rollover to a Roth IRA in one of your names?  And if so, does that reset the 15-year clock?  

The law is unclear about this, but it should be addressed by the IRS before it comes into effect in 2024.  Until then, just know there is a potential solution for these unused 529 funds over time, and is perhaps one of the most interesting developments with the SECURE Act 2.0!

Spouses who inherit IRAs

The current law allows spouses to;

  • Rollover the IRA into their own IRA
  • Elect to treat the decedent’s IRA as their own
  • Or simply remain as the beneficiary of the IRA

Beginning in 2024, the SECURE Act 2.0 will now allow for the surviving spouse to essentially treat the IRA as if they were the deceased spouse. 

This could be beneficial if the surviving spouse is older than the deceased spouse, as they could potentially delay RMDs for longer.   Additionally, if the surviving spouse passes away before the initial owner would have reached RMD age, their beneficiary would have some flexibility with the 10-year rule.

IRA and 401k Plan Catch-up Contributions

When you are over the age of 50, you are eligible for “catch-up” contributions.  IRA catch-up contributions have been $1,000 for 15 years!  Finally, they will be indexed for inflation, I guess in response to record-high inflation all around.  Makes sense to me!

This will begin in 2024, and adjustments will be made in increments of $100. 

Starting in 2025, SECURE Act 2.0 will allow for additional catch-up contributions for certain qualified plan participants.  Those who are 60-63 have their plan catch-up contribution limit increased to the greater of $10,000, or 150% of the regular catch-up contribution.  This limit applies to plans like 401ks, 403bs, 457bs, and TSP accounts. 

SIMPLE IRA participants ages 60-63 also have their catch-up contributions increased to $5,000 or 150% of the regular catch-up contribution.

Catch up contributions for high income earners

Starting in 2024, catch-up contributions for workers with wages over $145,000 during the previous year will be automatically characterized as Roth contributions, not traditional.  There are several key planning considerations with this change.

  1.  There are income phaseouts that ultimately eliminate participation in a Roth IRA for individuals (for 2023, a single filer is phased out at $153,000, and married filing jointly at $228,000).   Given 401k catch up contributions have NO income phaseouts, this is a BENEFIT to some 401k/403b participants who prefer Roth contributions over Traditional
    1. If a participant between the age of 60-63 prefers Roth contributions, they could in essence max out approximately $41,250 into Roth accounts starting in 2025!
      1. $22,500 for Roth 401k/403b (regular deferral max)
      2. +$11,250 catch up contribution for ages 60-63 (new catch up limit beginning in 2025)
      3. +$7,500 Roth IRA contribution or backdoor Roth IRA contribution (if done properly)
  2. If the plan does NOT allow for Roth contributions (which are becoming less and less common), then the catch-up contributions will be pre-tax instead.

Some higher income earners might actually PREFER traditional (pre-tax) contributions, especially those who believe their tax bracket will go down in retirement.  

We still need clarity on a few provisions within this section, so stay tuned as we get closer to 2024!

Final word

There are many investment and tax planning opportunities in the years ahead, it makes me excited to serve our clients!

It has been a tough couple of years, and many of you might be wondering if you should be making adjustments to your portfolio.  Or, perhaps you have an advisor that focuses mostly on investments and not retirement and/or tax planning.

We will be accepting 12 more clients for 2023, and we would be more than happy to see if you are a good fit to work with us (and vice versa).  Feel free to schedule a “Mutual Fit” Zoom Call using the link below.

Also, make sure to subscribe to our newsletter to get our latest insights delivered to your inbox.

Until next time!


The 7 Most Tax Efficient Retirement Income Strategies

Tax efficiency maximizes retirement income!

When I started my first job as a soccer referee at 12 years old, my Mom used to tell me; “it’s not what you earn, it’s what you keep!” 

I’m not sure if working at 12 years of age is legal any longer, but I’ve had a job ever since.  My Mom instilled in me the value of forced savings and paying yourself first.   (thanks, Mom!)

I’ve been practicing financial planning now for over 14 years, and I find this quote is highly relevant for taxes.

Tax inefficiency of retirement income is one of the biggest drags on returns.   In fact, taxes are likely the largest expense for retirees, even more so than healthcare costs!

While we can’t control the stock market, we can control our taxable income (to a certain extent).

This article will outline the 7 most tax efficient retirement income withdrawal strategies so you can maximize spending on your lifestyle, not the IRS. 

1. Roth IRAs + other Roth Accounts

As you know, this is one of my favorite tax efficient income strategies for retirement.  Sure, you will forgo the tax deduction for contributions, but in exchange for a lifetime of tax free (“qualified”) withdrawals.   I’ll take that tradeoff any day!

Here is the nuts and bolts of how these accounts work:

  • You make a contribution (whether it’s payroll deductions with work or IRA contributions).
  • You invest the money according to your goals and risk tolerance.
  • Enjoy tax free withdrawals, assuming they are “qualified”:
    • The account is at least 5 years old (for an IRA)
    • You are 59 ½ or older

Your contributions in these accounts are always tax and penalty free, but you might have taxes and penalties on earnings if your withdrawal is “nonqualified.” 

There are some exceptions like for first time home purchases, educations expenses, etc.  But if you are reading this, these will likely not be of interest to you anyhow!  Why would you cash in your most tax efficient retirement vehicle for anything other than retirement?

There are some limitations on these accounts.


  • For Roth IRAs – the max contribution for 2022 is $6,000/year (if you are over 50, you can contribute $7,000/year)
  • For a Roth 401k/403b – the max contribution for 2022 is $20,500 (if you are over 50, you can contribute $27,000/year)

These contribution limits are per person.  If you are married, your spouse has their own limits to take advantage of.

Income phaseouts:

If you are over a certain income threshold, you might be phased out completely from a Roth IRA contribution (don’t worry, there may be a loophole).

Roth 401ks/403bs etc. are NOT subject to income phaseouts.  You can make $1million/year and still max out a Roth 401k.  Check out your 401k plan rules to see if there is a Roth option in lieu of the traditional.

Enter the backdoor and mega backdoor Roth contributions

In 2012, the IRS lifted the income limits for “Roth conversions.”  A Roth conversion simply means you convert all or a portion of your Traditional IRA to your Roth IRA.  You will then be responsible for any taxes due at that time.  However, you may find this compelling based on your expectations on where taxes might go in the future.

Here’s the loophole…there is no income cap for non deductible IRA contributions.  Therefore, savvy tax planners can make non deductible IRA contributions, and immediately convert those dollars into their Roth IRA!  This is known as a backdoor Roth contribution!

Pro tip – be careful of the IRA aggregation rule or your conversion may not be tax free!

Now, companies are starting to allow for “Mega Roth 401k/403b conversions!” Depending on your plan rules, you can not only contribute the maximum to a Roth 401k, but you can make an additional non deductible contribution up to the 402g limit.  That non deductible contribution can then be converted to your Roth 401k to enjoy tax free growth!  

Sound too good to be true?  Well, lawmakers are looking to shut this down ASAP, so take advantage while you can and read your plan rules to see if it’s allowed.

tax planning for retirement

2. Health Savings Accounts (HSA)

Healthcare will likely be one of your largest expenses in retirement, so why not pay with tax free income? 

In order to participate in an HSA, you must have a high deductible healthcare plan.  Talk to your HR team about which plans allow for these accounts.  

In general, if you are going to the doctor frequently or have higher than average medical bills, a high deductible health care plan may not be right for you.  However, if you are pretty healthy and don’t go to the doctor often, you might consider it so you can take advantage of the tax free HSA.

HSA’s have a triple tax benefit:

  • Tax deductible contributions
  • Tax free growth
  • Tax free distributions (if used for qualified medical expenses)

This triple tax benefit is the reason it’s one of the most tax efficient retirement income strategies!

You can also use an HSA to help pay for long-term care costs or even pay long-term care insurance premiums tax free.  

Try not to tap into this account early

You might be tempted to reimburse yourself the year you have a major surgery or other medical bill.  If you can pay out of pocket, do that instead!  As your account grows, you can even invest it according to your risk tolerance and time horizon.  This helps amplify the benefit of tax free compounding!

Save your medical bill receipts

There is no time limit on when you reimburse yourself.  You could have surgery in 2022, and reimburse yourself anytime in retirement tax free!

Planning a major trip in retirement?  Take a look at some medical bills you paid 20 years ago and reimburse yourself from the HSA…now you have more money to enjoy that trip instead of paying Uncle Sam!

Don’t leave this as a legacy

Your beneficiaries (other than a spouse) will have to liquidate the HSA the year you pass away, which could create an unnecessary tax bill for your heirs.  Spend it while you can, name your spouse as beneficiary, and enjoy this triple tax advantaged account!

3. Life Insurance

Life Insurance is an often misunderstood, misrepresented, and misused financial tool for retirement.  However, it can be used as a tax efficient retirement income strategy, or a tax efficient intergenerational wealth strategy (dual purpose!).

I started out with a life insurance company and am so thankful I did.  First and foremost, I was taught to load up on life insurance while I was young and healthy (even before needing it), to lock in my insurability and health profile. 

Secondly, I was taught the benefits of permanent insurance and loaded up on this as well.  Again, before having any insurance needs at all! 

Over time, the cash values have grown, and I’ve been able to tap into this asset class at opportune times when other asset classes were temporarily at a discount! 

Ever hear of the concept “buy low, sell high?”  Well, how do you buy low if all of your assets are down at the same time?

As we’ve seen with the market in 2022, bonds are not immune to significant drops in performance.  Life insurance keeps on keeping on!

Long term, my plan is to keep the insurance as a tax free legacy for my three boys (and hopefully grandbabies!).  There is no other financial vehicle that provides an amplified tax free death benefit like life insurance. 

Which type of insurance should I own?

Raising children is expensive.  Inflation has made it even more difficult!  If you are strapped for cash and are worried about making rent or your mortgage on time, you should buy some inexpensive term insurance and protect your family.  

Pro tips:

  • Buy lots of coverage – a rule of thumb is 10x – 16x your gross income, but some insurance companies allow you to buy 25x your gross income!
  • Make it portable.  If you are healthy, buy a policy NOT tied to your workplace, as you never know how long you will stay there.
  • Make sure it’s convertible.  Even though you may not be a good candidate for permanent insurance today, that may change over time.  Perhaps when your kids are out of the house, or your mortgage is paid off, or your income has skyrocketed.  Being able to convert to a permanent policy without medical underwriting is extremely helpful.  

For those of you comfortably maxing your tax advantaged retirement plans and HSA’s (as discussed previously), overfunding a permanent life insurance policy can be a great supplemental savings tool.  

There are multiple flavors of permanent life insurance that we won’t go into detail on in this article.  But in general, you can invest in fixed products or variable products.  This feature will impact the performance of your cash value, and potentially your death benefit.  

You can also add a long-term care rider on some policies to kill two birds with one stone.  That way, if you are someone who never needs long-term care, your family will still receive the death benefit.  

What I have found is that the intention might be to use this cash value as a tax efficient retirement income strategy, more often it’s used for the death benefit.  All of you diligent savers will accumulate assets in your 401ks/IRAs, taxable brokerage, HSA’s etc., and you might realize that this amplified death benefit is best used to enhance your intergenerational wealth objectives.  Plus, it gives you a license to spend down your other assets in retirement “guilt free.”

Don’t worry about making that decision today, but just know this asset can be a flexible vehicle throughout your lifetime.

4. Taxable Brokerage Accounts

This bucket is one of my favorite tax efficient retirement income strategies for three reasons:  

  1. There is no income restriction on who can contribute
  2. There is no cap on contributions
  3. There is no early withdrawal penalty

The title of this account sometimes leads people to believe it’s not tax efficient.

And this can be true if you invest in certain securities within the taxable brokerage account.

However, if you are strategic with your security selection, you can have minimal tax liability during the accumulation phase.  

In retirement, you can then use losses to offset gains, sell certain blocks of securities with limited capital gains, and use tax free income as cash flow by investing in municipal bonds (if appropriate).

I find this tool is great to maintain flexibility for funding college, saving for retirement, or any other major expenditures along the way. 

Intergenerational Wealth Planning

Certain assets are better used during your lifetime instead of passing on to your heirs, as we discussed with the HSA.  However, taxable brokerage accounts are extremely tax efficient for intergenerational wealth planning

When you pass away, your beneficiaries will get a “step up in cost basis” which will limit their tax liability if/when they sell that asset themselves.  

All in all, this can be a great multi functioning tool for retirement income, legacy, or any other major opportunity that comes along!

minimize taxes in retirement

5. Non Qualified Annuities

I find consumers have a negative connotation associated with the term annuity.  And, rightfully so.  These products, like life insurance, are often oversold or inappropriately utilized.  

In it’s purest form, annuities are used to provide a guaranteed income stream in retirement.  Think Social Security or a Pension. 

Creating a “retirement income floor” is one of the most powerful things you can do for yourself.  Believe me, when the markets go south, you don’t want to be worried about how to fund your basic living expenses in retirement.  

However, if Social Security + Pension + Annuity income covers your basic necessities, you can avoid losing sleep at night when the markets do take a dive (which they will!).

The tax efficiency components are twofold:

  1.  Tax deferred growth, much like a traditional 401k or IRA
  2. Exclusion ratio for lifetime annuity income

For you high income earners, you will want to limit tax drags on  your savings.  However, once you are maxed out of your qualified retirement plans, you’re going to be wondering where to go next.  One of the  benefits for annuities is the tax deferred growth.  You won’t receive a 1099 until you start the income payments in retirement!  

In retirement, instead of the gains being withdrawn first (“LIFO”), you can take advantage of the exclusion ratio.  This allows for a portion of your retirement income to be a return of basis, and a portion to be taxable income.  Therefore, it’s a great way to spread the tax liability over your lifetime. 

In retirement, if you decide you don’t need this income stream, you can flip on the switch to fund other tax efficient vehicles like life insurance or long-term care insurance.  

Intergenerational Wealth Planning

In years past, annuities were a terrible way to leave a legacy for your children.  Beneficiaries were often forced to take a lump sum distribution or take payments over a short period of time.  Now, some annuity contracts allow for the children to turn their inherited annuities into a life income stream.  This can also help spread out the tax liability over a much longer period.

I still recommend using these accounts during YOUR retirement phase and leave other assets to your children.  Having your beneficiaries deal with the death claim department within annuity companies can be a nightmare!

6. Reverse Mortgage

One of the largest, if not the largest, asset on your balance sheet over time will be home equity.  However, many retirees don’t maximize their home equity as an income tool, which could be a mistake. 

In simple terms, a reverse mortgage allows the homeowner to stay in their home as long as they live.  These products essentially flip your home equity into an income stream.  The income stream now becomes a loan with your home as collateral. 

Because it’s a loan, the income is not taxable to the borrower! 

Instead, the loan will be repaid from the home sale proceeds when you move, sell your home, or pass away. 

Creating this essentially tax free income stream can allow you to preserve other liquid assets on your balance sheet, like the ones mentioned above. 

It can also be a part of the “retirement income floor” concept that we mentioned previously.

7. Real Estate Income

You often hear of real estate investors paying little to no taxes.  The basic reason is the ability to deduct ongoing expenses from the income.

  • mortgage payments
  • taxes
  • insurance
  • maintenance
  • property management fees
  • And the “BIG D”  – Depreciation!

This depreciation expense is the real wildcard as it can essentially wipe out any taxable income you would otherwise have to report.  Depending on the property type, this can amount to approximately 3.6% of the cost basis year after year!  There is some “true up” at the end when you go to sell the property, but it’s a huge advantage to minimize taxable income while your property still cash flows! 

And once you sell the property, you can even take advantage of a 1031 tax free exchange and buy another investment property that better suits your overall financial goals.

Investing in real estate is not for everyone.  And it’s certainly not a passive activity, even if you have a property manager.  Studying your market, analyzing trends, upgrading your property and dealing with bad tenants are ongoing challenges.  

However, if you do it right, this can be an extremely tax efficient retirement income strategy.

Final word

Minimizing taxes in retirement is one of the most impactful ways to maximize your cash flow!  

However, most people don’t think about taxes in retirement…until they are about to retire!

These strategies only work if you begin building the framework 10, 20 or even 30 years before you quit your day job.  Furthermore, not all of the strategies discussed will make sense given your goals and financial circumstances. 

It’s important to consult with a fiduciary financial advisor that can take a comprehensive look at your financial plans.  

If you are interested in scheduling a call, feel free to use the calendar link below for a 30 minute “Mutual Fit” meeting over Zoom.

Also, make sure to subscribe to our mailing list so you don’t miss out on any retirement planning insights!

Until next time, thanks for reading.