Wealthy retirees often have a significant incentive to find tax breaks, given that they could face substantial tax bills without careful planning. But it’s not about finding secret loopholes.
“The rules in general are the same for everyone. The difference is how you apply them,” said Jay Zigmont, Ph.D., certified public accountant (CFP) and founder of Childfree Trust.
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Those with greater wealth often work with a financial professional who helps them stay up-to-date on new tax rules and interpretations — such as with the recently passed One Big, Beautiful Bill Act (OBBBA)– but anyone of any wealth level may still benefit from working with a tax planner to see if there are opportunities to reduce your taxable income. At the very least, you might look to see what others are doing to save money on taxes and consider if you can apply the same strategies. We’ve compiled some examples of these tax strategies below.
Roth Conversions
Converting pre-tax retirement savings into post-tax retirement savings via a Roth conversion can save a lot of money in the long run.
A traditional 401(k) or individual retirement account (IRA) is funded with pre-tax contributions, meaning you get a tax deduction on the contributed amounts in the year the contributions are made. That lowers your taxable income during your working years, but when you take that money out in retirement, it’s taxable. However, Roth distributions are not taxable.
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So, the conversion process involves paying taxes on the amount rolled into a Roth account, waiting at least five years and then being able to withdraw those funds and any gains tax-free. By paying taxes now and then letting the money grow tax-free, your net withdrawals can be way higher than if you were taxed on them like with traditional withdrawals.
Ideally, you can make the conversion when your tax rate is low so that you don’t owe much then and get the eventual tax break when withdrawing Roth funds.
“Wealthy retirees have a tax plan that minimizes their tax bill across their retirement. The key is to pay the right taxes, at the right time,” Zigmont explained. “When their income is down, they may do Roth conversions.”
Timing Withdrawals To Avoid Large RMDs
Another common strategy among wealthy retirees, Zigmont said, is implementing a plan to draw down accounts like an IRA in a way that avoids large required minimum distributions (RMDs). RMDs start at age 73 for traditional IRAs and the amounts you’re required to take out depend on the value of your account. The more money you have, the more you have to withdraw and that’s considered taxable income.
So, if you can minimize RMDs, you can potentially minimize your taxable income. This can tie into Roth conversions, as a Roth account does not have RMDs during the owner’s lifetime. It can also involve carefully planning when to take money out of a traditional IRA, like at a time when your income is lower than it would be if taking a large RMD in the future.
For example, you might have limited income your first year of retirement if you’re living off savings and have delayed taking Social Security. That might be a good time to take some money out of your IRA, such as up to the standard deduction amount — based on some changes from the new OBBBA tax law, that could total as much as $46,700 for married couples ages 65+.
By taking that money out when facing low or no income taxes, you then lower the amount that will later be part of RMDs, which can save you money in the long run.
Maximizing Capital Gains Exemptions
Lastly, wealthy retirees often strategically withdraw investment gains, known as capital gains, to minimize these taxes.
“I believe the single most powerful tax break wealthy retirees can access is the zero-percent tax bracket for capital gains,” said Aaron Brask, principal at Aaron Brask Capital.
Capital gains are added to your taxable income, but long-term capital gains, meaning assets held over a year, have a 0% tax rate if your total taxable income is $96,700 or less for a married couple filing jointly.
When you add in the higher standard deduction amounts now available to seniors, noted Brask, that can mean receiving over $125,000 in qualified dividend income without paying any taxes.
However, you have to plan carefully, as this ties into other areas like IRA withdrawals, which would increase your taxable income and possibly bump your capital gains into the next tax bracket of 15%.
But regardless of your wealth level, this type of strategy shows how careful planning can go a long way toward minimizing your taxes.
“This zero-percent capital gains tax bracket also applies to those of us with less wealth. Indeed, prudent financial planning can help many people reduce and possibly eliminate, taxes by coordinating how they extract income from their investments, pre-tax accounts and Social Security,” Brask said.
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This article originally appeared on GOBankingRates.com: 3 Tax Breaks Upper-Class Retirees Take Advantage Of
