Strategic tax planning is always a critical aspect of maximizing retirement outcomes. Yet, with the ever-changing tax landscape, recent developments may have heightened client concerns about how future tax laws could impact their plans. Here are strategies to consider regardless of the political climate.

Boost savings while minimizing tax burdens in retirement

Maximizing contributions to tax-advantaged accounts such as IRAs, 401(k)s and Roth IRAs can reduce taxable income today and lead to tax-deferred or tax-free growth for the future, potentially helping to preserve more wealth for retirement and providing greater flexibility in managing future tax liabilities. Once contribution limits are reached, consider annuities as an additional tax-efficient savings option. Diversifying across pre-tax, taxable and tax-free accounts offers flexibility and may help optimize after-tax returns, particularly for high-net-worth clients. Additionally, strategic Roth IRA conversions prior to retirement can take advantage of known tax rates and reduce future tax burdens. SECURE 2.0 Act has expanded Roth options, creating even more opportunities for tax-free growth.

Keep up with tax-law changes and tax-efficient investment options. Municipal bonds, dividend-paying stocks and low-turnover mutual funds and exchange-traded funds (ETFs) can help reduce tax burdens and may improve retirement-income planning. 

Plan ahead to optimize retirement withdrawals and maximize outcomes

Strategizing withdrawals is crucial for maximizing retirement savings and minimizing tax liabilities. This involves understanding the impact of withdrawals on tax brackets, timing these strategically and considering various income sources.

Considerations for retirement income planning
For effective withdrawal planning, it’s essential to factor in taxes. Here are some key things to consider:

• Tax-bracket management: Assess the client’s current and projected income levels to determine optimal withdrawal amounts to avoid moving into higher tax brackets.
  
  
• Plan for Social Security taxation: Review the timing of taking retirement benefits along with other income sources to minimize tax burden while potentially increasing monthly payments.
  
  
• Understand the Rule of 55¹: Evaluate your client’s eligibility for the Rule of 55, which permits penalty-free withdrawals from employer-sponsored retirement accounts if your client left their employer at age 55 or later. Discuss whether taking early withdrawals aligns with their long-term retirement goals.

Required Minimum Distributions (RMD) and related strategies
The SECURE 2.0 Act made several changes to RMDs, so it’s important not to overlook them and to include them when planning withdrawals. Such changes include an increase in the age at which required minimum distributions must begin from 72 to 73 (74 in 2030 and 75 in 2033) and a reduction in the penalty for not taking an RMD from a qualified plan or IRA from 50% of the required amount not taken to 25%.

• RMD planning: RMDs are the minimum amounts retirees must withdraw annually from their retirement accounts. Strategically schedule them to manage taxable income while avoiding penalties. Deferring some distributions may be a consideration for tax efficiency. Check out our RMD guide for IRAs for more information. It’s important to note this guide does not address the impact to employer-sponsored plans.
  
  
• Qualified Longevity Annuity Contract (QLAC): As a complementary strategy, consider using a QLAC to lower an individual's RMDs, reducing current tax liabilities and providing a future income stream.

Charitable giving and estate planning
Navigating the complexities of retirement planning also requires a strategic approach to charitable giving. How well you know your client will determine how deep a conversation you can have around legacy and related tax implications.

• Qualified Charitable Distributions (QCD): Consider using QCDs for tax-advantaged charitable giving and to satisfy RMD thresholds.
  
  
• Estate planning considerations: Estimate the tax impact of retirement withdrawals on inherited accounts. Work with estate planning professionals to create strategies that minimize taxes and maximize the assets passed to clients’ heirs.

Tax efficiency
Look at both withdrawals and investments from a tax perspective.

• Tax-loss harvesting: Annually review client portfolios to identify opportunities to offset gains and potentially reduce taxable income.
  
  
• Other income sources: Integrate all retirement income sources — such as pensions, annuities, rental income or part-time work — into the withdrawal strategy.
  
  

• Keep an eye on rebalancing: Rebalancing can involve selling investments like stocks or bonds. If done in a tax advantaged account like a 401(k) there won’t be any tax impact. But if rebalancing in a taxable account, the client may have to pay taxes.
   

Health care and long-term care planning

Health-care costs continue to rise and are becoming an increasingly larger share of retirement costs.

• Health-care costs and tax planning: Discuss the tax effects of health-care expenses in retirement, such as Medicare premiums and deductible medical costs. Consider tax-advantaged health-care funding options like Health Savings Accounts or long-term care deductions.
  
  
• Long-term care: Explore the potential need for long-term care and insurance options that may offer tax benefits.
  
  
• Consider an HSA: If enrolled in a high-deductible health plan, clients may have used a Health Savings Account (HSA). This tax-advantaged account allows for tax-free growth on earnings as well as withdrawals for qualified medical expenses in retirement, with contributions also receiving a tax break. Additionally, HSAs can transfer tax-free to a spouse upon death, making it an asset for long-term planning.

How financial and tax professionals can help:

• Regularly review and adjust retirement withdrawal strategies as clients’ financial situations, applicable tax laws and goals change. Develop a comprehensive list of all income-generating accounts (including protected lifetime income such as Social Security, pensions and annuities) to help ensure tax efficiency and keep clients on track with their retirement planning objectives.
  
  
• Stay informed about tax-law changes and understand tax advantaged accounts like 401(k)s, IRAs and Roth IRAs so you can make proactive adjustments and help optimize retirement savings for clients.
  
  
• Collaborate with tax and estate professionals to tailor strategies to individual needs and changing circumstances.

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