Are you concerned about how taxes may impact you down the road? You're not alone. According to the
These tax-efficient strategies—starting with your tax filing—can help you reduce your taxes for the long term.
What can you do to potentially lower your taxes for the long term?
While you can’t control the outcome of potential tax changes to come, 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.
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 that you have not entered your peak earning years yet and may fall into a higher tax bracket as you near retirement? “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, Advice Services consultant for Thrivent. “But by the time they retire, they could fall into a 22% or 25% bracket.”
Consider working a
- 2023 contribution limit: $6,500
- 2024 contribution limit: $7,000
- Catch-up limit: $1,000
Roth IRAs have income limits to participate.
- If you make between the maximum MAGI listed, you can contribute but it will be a reduced amount.
- If you make equal to or more than the maximum limit listed, you can't contribute anything to a Roth IRA. If this applies to you,
check out these alternatives.
|2023 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
|2024 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
|Single or head of household
|Married filing jointly
|Married filing separately
Do you already have a traditional IRA? Consider a Roth conversion.
If you already have a traditional IRA and are interested in a Roth IRA, 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. The
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
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.
"We see thousands of cases with clients missing this opportunity. If it’ll lower your taxes, why not do it?” says Tom Hussian, Advice Services consultant for Thrivent.
3. Consider tax-exempt municipal bonds
In addition to offering automatic federal tax benefits, tax-exempt
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 a no- or low-tax state don’t have the same tax advantages.
4. Maintain a permanent life insurance policy as an asset
While the primary purpose of life insurance is to protect your loved ones, the right policy also can help you both manage taxes. Unlike other retirement plan proceeds, beneficiaries receive
Permanent life insurance, such as
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 or through a policy loan.5,6 But before you access these funds early, it’s advised to connect with a financial advisor or tax professional to avoid unnecessary tax consequences. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.
Your contract (such as whole life) may also be eligible for
> Learn more about
5. Consider tax-efficient options for charitable giving
Charitable remainder trusts
You may qualify for a tax deduction in the year that you add assets to the trust, even though the charity might not receive the remainder interest for years. And if you can't use the entire deduction in the year you give, you may be able to carry the deduction forward for five additional years.
Charitable gift annuity
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)
> Learn more:
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?
“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.”
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?