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.
What can I do when I file in 2022 to potentially lower my taxes for the long term?
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
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.
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.
1. Leverage the Roth IRA advantage
Are you expecting to fall into a higher tax bracket as you near retirement? Consider
“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
2. Open a spousal IRA
“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
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.
3. Find out if you can benefit from tax-exempt municipal bonds
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.
4. Maintain a whole life insurance policy as an asset
While the primary
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
But before you access these funds early, it’s advised to connect with a financial advisor or tax professional to avoid unnecessary tax consequences.
5. Consider tax-efficient options for charitable giving
Charitable remainder trusts
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
Another common strategy is to purchase a
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.
Qualified charitable distributions (QCDs)
If you’re 70½ years or older, you can now make tax-free
To learn more about how to think about charitable giving in relation to taxes, read about
There is a relatively narrow window of time to act to potentially reduce your tax burden. And although accountants and tax preparers focus on cutting your taxes today, not all can project what taxes might look like in the future.
How can Thrivent help me develop tax-efficient strategies today and in the future?
“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
“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.
How a financial advisor can help
“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?