5 tax-efficient strategies to include in your retirement plan

Nearing retirement age? These tax-efficient strategies—starting with your 2022 tax filing—can help you reduce your taxes for the long term. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.

The Tax Cut and Jobs Act of 2017 brought some of the lowest tax brackets since the inception of the Federal Income Tax in 1913. However, the current 29-trillion-dollar federal deficit is just one factor that causes people to anticipate tax hikes in the near future. While you can’t control the outcome of tax changes, you can take proactive moves in your retirement tax planning to help buffer the effects of higher taxes.

The historically lower tax rates we’re now enjoying could be your best tool for creating future savings, so make good use of them. “The thing we see with families—dual income with kids and a mortgage—is that they’re in the 12% tax bracket, for example, and often contributing to a pre-tax account,” says Ron Lutes, Advanced Markets Consultant for Thrivent. “But by the time they retire, they could fall into a 22% or 25% bracket.”

How can you reduce your tax burden? “We categorize a client’s assets—everything from Social Security and mutual funds to life insurance – into three categories: tax now, tax later, tax never,” says Todd Yeiter, Director of Advisor Support. Those three buckets are helpful when you think about how to distribute your investments in the most tax-efficient ways possible.

A clear tax strategy can help you do more with your retirement funds, so you can reach your goals for retirement and beyond. Consider the following wise tax moves in your retirement plan.

Are you expecting to fall into a higher tax bracket as you near retirement? Consider converting your traditional IRA to a Roth IRA.¹ Doing so can help you avoid the tax consequences of required minimum distributions (RMDs) once you’re in retirement, giving you a potential tax break (at an already lower rate), as current qualified distributions from Roth IRAs are tax-free.

“We always like to have a component [of a portfolio] with the potential not to be taxed in the future,” says Yeiter. One of the key benefits of a Roth IRA is that its growth isn’t taxed. So, over the long term, the tax you paid now on the Roth conversion effectively lowers as your assets grow, since it’s spread over a greater amount of money.

Roth conversions can support your legacy plan, too. With the SECURE Act now requiring most IRA beneficiaries to complete withdrawals within 10 years, many families’ legacy plans are in jeopardy—particularly the affluent. However, with a Roth conversion, you’ll pay at today's current tax brackets, which may be lower for many taxpayers, so your heirs won’t be taxed at all.²

“In a household where only one spouse works, you can increase your contributions—and lower your taxes now—with a new IRA account for the non-working spouse. This is best explained through an example adapted from this IRS publication:

Let's say John is a full-time student with no taxable income. His wife, Shelby, makes an annual taxable income of $80,000. Shelby is currently contributing to an IRA at $6,000 a year, or their contribution limit because they are less than 50-years-old. She opens a second IRA under John’s name to increase their contribution.

If they joint file, John can add Shelby’s annual income minus her contribution ($80,000 - $6,000 = $74,000) to his compensation (in this case, $0) to determine his maximum contribution amount. Because their joint compensation is $74,000 his personal IRA contribution limit is also $6,000.

That means they can double their IRA contribution, and if they don’t mind foregoing the tax deduction, they can both choose to contribute to Roth IRAs instead. You may contribute to a Roth IRA if your modified adjusted gross income for 2022 is less than $129,000 (single filer) or less than $204,000 (joint filer). “We see thousands of cases with clients missing this opportunity. If it’ll lower your taxes, why not do it?” says Tom Hussian, Advanced Market Specialist for Thrivent.

In addition to offering automatic federal tax benefits, tax-exempt municipal bonds can, in some cases, offer state-tax benefits. If you buy municipal bonds issued in your state, you often avoid state and local taxes.³ Additionally, if you live in a no income tax state, you can maintain tax-free income with this additional investment.

However, it’s important to double check your local tax laws to see whether you qualify for certain benefits because the tax advantages of municipal bonds depend on your income and where you live.

For example, high income households that live in high-tax states often benefit most from investing in municipal bonds, whereas those with lower income and live in no- or low-tax state don’t have the same tax advantages.

While the primary purpose of life insurance is to protect your loved ones, the right policy can also help you and your loved ones manage taxes. Unlike other retirement plan proceeds, beneficiaries receive life insurance payouts tax-free.⁴

Remember, while term life insurance expires after a predetermined period, whole life insurance grows on a tax-deferred basis all your life (or until you or your beneficiaries use it), allowing your funds to grow faster because the interest on your cash value is applied to the higher, tax-deferred amount.⁵

You can also typically enjoy tax-free dividends,⁶ or the annual payments your insurance company applies to your accounts based their profits. If you ever need to dip into your funds prematurely, you can access the cash value on a tax-advantaged basis, meaning you have tax-free access up to the amount you’ve contributed through your premiums.^7,8

But before you access these funds early, it’s advised to connect with a financial advisor or tax professional to avoid unnecessary tax consequences.

Naming a charity as a beneficiary of your qualified account is the easiest way to reduce your taxable assets at death. If you use a Charitable Remainder Trust (CRT) to gift an IRA or other qualified account, payments to beneficiaries are taxable income. But unlike similar bequests to family members, distributions can stretch over 20 years—double the SECURE Act’s distribution time clock.

Another common strategy is to purchase a deferred annuity, also called a charitable gift annuity, as a gift to a chosen organization. By taking some non-qualified investments and giving them to charity, you may qualify for an immediate tax deduction—preferably when taxes are low—and, after an initial period of time, turn on a stream of income you can tap anytime in retirement.

This opportunity can allow a taxpayer to reposition retirement assets as well as other non-qualified assets, while minimizing their taxable income. Lutes uses the hypothetical case of a couple, ages 82 and 78, in the 12% tax bracket:

In the early 1980s they invested $1,000 in an up-and-coming tech giant and never touched it. Now, with perhaps half a million dollars or so in appreciated stock, they face capital gains taxes.

“But by creating a $100,000 charitable gift annuity, they can draw $5,400 of annual income whenever they want. Then, by itemizing enough deductions against a $100,000 distribution, they can enjoy that money with minimal taxation,” Lutes explains.

If you’re 70½ years or older, you can now make tax-free qualified charitable distributions of up to $100,000 each year from your qualified account—as long as it goes directly from your account to a charity. This way, you’ll be able to make your RMDs without increasing your taxable income.

To learn more about how to think about charitable giving in relation to taxes, read about maximizing your charitable giving for tax time.

“There is a relatively narrow window of time to act to potentially reduce your tax burden,” says Yeiter. “And although accountants and tax preparers focus on cutting your taxes today, not all can project what taxes might look like in the future,” he adds.

However, working with a financial advisor to lower your taxes in the future is a worthwhile and rewarding process—especially if you do your homework.

“Every client should take the time to fill out the Tax Efficiency Checklist (also available from a Thrivent financial advisor) to get a better understanding of where their current savings and investments are sitting from an income tax perspective,” says Yeiter.

“Very few people have much, if any, money in the ‘tax never’ category. Sharing your most recent income-tax return can more accurately project your long-term tax profile,” suggests Yeiter.

Also be sure to advise your financial advisor of any potential money you may receive in the future from a property sale, bonus or other windfall. To develop a plan to potentially lower your short- and long-term taxes, consult a certified public accountant and/or your attorney.

“Our proprietary tool, What-If Tax, can generate side-by-side hypotheticals involving many of the tax-reducing tactics discussed above. Using this and other Thrivent applications, financial advisors can work alongside the client’s tax professional to provide tradeoffs and suggest options,” says Yeiter. You’ll benefit from seeing upcoming life events from a tax perspective.

Summing up the financial advisor’s role in helping you reduce taxes, Hussian says: “What if your friend is growing a vegetable garden and they’re losing two out of 10 of their vegetables to poor soil conditions? If I could show them ways to lower that loss to 10%, I’m giving them something valuable.”

Ready to talk to a financial advisor? Connect with someone near you.