Methods to Minimize Taxable Income in Retirement

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calliecake47
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Methods to Minimize Taxable Income in Retirement

Post by calliecake47 »

We are continuing to transition many different things now that we have been retired for a while. We have a very good handle on all costs (fixed, discretionary, charitable, gifting, etc.) but now we want to look at optimizing both of our fixed and equity holdings with a goal of reducing taxes. We have more than enough funds to carry our future, so the current task is about any methods to control taxes within our overall plan which also considers heirs.
- we have been reducing our tax deferred accounts each year thru Roth conversions
- current tax deferred is about $1,000,000
- taxable accounts are about $7,000,000
- taxable accounts are about 75% equity/25% fixed (of which 20% is tax exempt)
- we have some limitations in the taxable equity side due to unrealized gains
- we’re likely to take SS in about 1-1/2 years (about $85K current SS report)
- a total draw amount of about $150K per year for everything is our baseline goal. This is in a year or so after last Roth conversions are completed
- we would also like the flexibility to spend in excess of $150K per year on an infrequent basis

Currently the taxable account will yield around $170K, of which $55K is tax exempt. Along with the near future SS we have excess income that is not needed but is taxable. Any thoughts would be appreciated.
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Re: Methods to Minimize Taxable Income in Retirement

Post by RyeBourbon »

How is tax-deferred invested?
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bombcar
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Re: Methods to Minimize Taxable Income in Retirement

Post by bombcar »

You may need to look at a holistic tax situation including estate taxes if you truly want to minimize total tax.

Also the goal should be maximum after tax return not minimal tax.

One way to reduce tax is to reduce expenses by prepaying when possible.
delamer
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Re: Methods to Minimize Taxable Income in Retirement

Post by delamer »

Start gifting shares that generate interest/dividends to heirs now.

Use QCDs for charitable giving once eligible.

As alluded to earlier, there is a difference between minimizing taxes and maximizing after-tax income.

As soon as you start giving away income-producing assets, you are reducing taxable income and therefore taxes.
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Artsdoctor
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Re: Methods to Minimize Taxable Income in Retirement

Post by Artsdoctor »

In order to help you with your tax goals, it would also help to get an idea of what sort of financial goals you have from a bird's eye view. What are your legacy plans? How active are you with philanthropic interests? You have the assets to support your income needs so there's no question there. At this point, try to zoom out a bit about your larger plans.
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Hacksawdave
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Re: Methods to Minimize Taxable Income in Retirement

Post by Hacksawdave »

Mine is about half the size, but you can review my prior posts on hybrid withdrawals as I strive for the same as you inquired. I have 15 years before I must worry about RMDs and live in the high tax state of CA. In 5 years of early retirement, I have managed to stay in the 1-4 percent combined federal and CA tax liability rate after years of averaging over 37%.

I will make some assumptions as there is not too much information provided:

• I will assume that your taxable distributions are all set for cash distributions.
• Your expense needs are being met by the income produced.
• You are not at RMD age for the remaining 12% of tax-deferred accounts.
• Your Roth conversions are at a lower amount just enough to fill a specific bracket.

My ratio of tax-deferred is higher than yours at around 38%, but it is mostly income producing assets with 20% in equities so as not to increase the balance. I do not know how far off you are from RMDs, but at a point it would just make sense to spend or donate it and not convert it. Your legacy is in the CGs in the taxable account that your heirs would currently receive step-up basis rules.

If stock dividends are not needed, then a portion could be redirected to municipals to increase that bucket instead. I would lean against producing ordinary income within the taxable account and staying with QDs and municipal income.
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David Jay
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Re: Methods to Minimize Taxable Income in Retirement

Post by David Jay »

If I was in your shoes, would be gifting my heirs to the maximum without reporting ($18,000 per person per giver). The two of you can give a total of $36,000 to each individual.

For example: with 2 heirs, each married, that is $144,000 a year to help hold down the increase in your taxable holdings.
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Re: Methods to Minimize Taxable Income in Retirement

Post by TomatoTomahto »

David Jay wrote: Sat Jun 08, 2024 11:31 am If I was in your shoes, would be gifting my heirs to the maximum without reporting ($18,000 per person per giver). The two of you can give a total of $36,000 to each individual.

For example: with 2 heirs, each married, that is $144,000 a year to help hold down the increase in your taxable holdings.
+1. Things to consider: the state of the marriage if gifting to a child-in-law and also your views on encouraging/discouraging lifestyle choices for your children.
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livesoft
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Re: Methods to Minimize Taxable Income in Retirement

Post by livesoft »

If you give away appreciated shares to your Donor Advised Fund from your taxable account, then you can deduct on Form 1040 Schedule A up to 30% of your AGI. Since you are extremely wealthy it should be no hardship giving away say $70K from $210K of AGI leaving you with $140K taxable income or less.. Of course, that $210K is not what you can spend since you will also have return of capital which is not taxed and does not appear in AGI.

Since a Roth conversion increases your AGI, you can convert whatever you want by increasing your charitable donations.
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Re: Methods to Minimize Taxable Income in Retirement

Post by Jack FFR1846 »

In addition to minimizing taxable income, also look forward to RMD times with respect to IRMAA. Minimizing "income" should probably be a priority to avoid those IRMAA penalties which hit not only you but also your spouse. What I'm currently doing with future large RMDs in mind.

Reducing income:
I'm removing cash from my high yield savings that pays 4.9% and using the cash to buy BRK/b in my taxable account. It throws no dividends.
I'm slowly selling VTI and SCHB in my taxable account. They both throw dividends.
I am not and DW is not taking social security now because it would add taxable income and AGI and reduce Roth conversions staying under the IRMAA limit.
When a stock/fund drops below its basis, sell for a loss if over 30 days since you've bought it (in any of your accounts) in taxable. This can subtract income. You can either use this to simply take the cash out or invest in a non-dividend payor like BRK/b or AMZN

Reducing future RMDs to avoid IRMAA:
We are doing Roth conversions to below the lowest IRMAA limit.
The above show how we are reducing future income.

Getting income with low tax:
Sell long term funds/stocks, especially those that produce taxable dividends. Tax is then LTCG rather than ordinary income.
Get cash out of your Roth.
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tibbitts
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Re: Methods to Minimize Taxable Income in Retirement

Post by tibbitts »

Unless I missed it the OP didn't mention anything about gifting, to charity or individuals. It's important to decide if the objective is to reduce taxes or to have the most amount of money to spend, net of taxes. Having the most money to spend might not result from paying the least possible amount in taxes.
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calliecake47
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Re: Methods to Minimize Taxable Income in Retirement

Post by calliecake47 »

Thanks everyone for all the input and great suggestions. Agree the goal is to maximize returns, just looking for the best way to do that while minimizing taxes, since when we start taking SS, we won’t be using some of that income. We are aware of and are already doing most suggestions, so I feel good that we are of common mind there. Some great suggestions, we can’t do quite yet, because we’re not at RMD age for a couple more years, but I will place hold them.

I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?

We’re also interested in learning more about the BRK/b shares and other similar, non-dividend paying stocks or mutual funds of that type, or even higher risk investments. We had contemplated that but haven’t pulled the trigger. I will have to do more research there.
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Re: Methods to Minimize Taxable Income in Retirement

Post by livesoft »

calliecake47 wrote: Sat Jun 08, 2024 2:25 pm I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?
When we gift shares to our children, we tell them the date(s) we acquired those shares and the prices we paid (the cost basis). We don't care if it costs them in taxes that's their problem. They can decide to keep the shares forever until they gift them to charity or dispose of them as they wish.

They do NOT get a step up in basis when we gift them shares. Thus we do this very rarely.
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EricGold
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Re: Methods to Minimize Taxable Income in Retirement

Post by EricGold »

You are (I think) in the 0%/15% brackets for CG and QUAL-DIV in your taxable account

If I figure income of
85k SS
40k pre-tax (4% of $1M balance)
25k from post tax account

Ordinary taxes are $5,107 for MFJ both 65+, which is 12.07% of the pre-tax portion and 0% of the SS portion
Further conversion to Roth at 12% is OK as a hedge but don't expect big tax savings; in fact, I think it will end up costing you more by pushing more of your CG and QUAL-DIV into the 15% bracket
delamer
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Re: Methods to Minimize Taxable Income in Retirement

Post by delamer »

livesoft wrote: Sat Jun 08, 2024 2:31 pm
calliecake47 wrote: Sat Jun 08, 2024 2:25 pm I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?
When we gift shares to our children, we tell them the date(s) we acquired those shares and the prices we paid (the cost basis). We don't care if it costs them in taxes that's their problem. They can decide to keep the shares forever until they gift them to charity or dispose of them as they wish.

They do NOT get a step up in basis when we gift them shares. Thus we do this very rarely.
We gift shares to our adult children each year. As noted above, their cost basis on the transferred shares is the same as ours.

However, we would not do the gifting if the income from the gifted shares would cause a significant tax burden to them. Yes, they can choose when to sell and so avoid capital gains taxes indefinitely.

But they must pay taxes on any dividends each year. That said, the amounts we are gifting are very unlikely to create a tax problem, dividend-wise.
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Topic Author
calliecake47
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Re: Methods to Minimize Taxable Income in Retirement

Post by calliecake47 »

livesoft wrote: Sat Jun 08, 2024 2:31 pm
calliecake47 wrote: Sat Jun 08, 2024 2:25 pm I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?
When we gift shares to our children, we tell them the date(s) we acquired those shares and the prices we paid (the cost basis). We don't care if it costs them in taxes that's their problem. They can decide to keep the shares forever until they gift them to charity or dispose of them as they wish.

They do NOT get a step up in basis when we gift them shares. Thus we do this very rarely.
Thank you
Topic Author
calliecake47
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Re: Methods to Minimize Taxable Income in Retirement

Post by calliecake47 »

delamer wrote: Sat Jun 08, 2024 4:20 pm
livesoft wrote: Sat Jun 08, 2024 2:31 pm
calliecake47 wrote: Sat Jun 08, 2024 2:25 pm I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?
When we gift shares to our children, we tell them the date(s) we acquired those shares and the prices we paid (the cost basis). We don't care if it costs them in taxes that's their problem. They can decide to keep the shares forever until they gift them to charity or dispose of them as they wish.

They do NOT get a step up in basis when we gift them shares. Thus we do this very rarely.
We gift shares to our adult children each year. As noted above, their cost basis on the transferred shares is the same as ours.

However, we would not do the gifting if the income from the gifted shares would cause a significant tax burden to them. Yes, they can choose when to sell and so avoid capital gains taxes indefinitely.

But they must pay taxes on any dividends each year. That said, the amounts we are gifting are very unlikely to create a tax problem, dividend-wise.
Thank you
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CyclingDuo
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Re: Methods to Minimize Taxable Income in Retirement

Post by CyclingDuo »

calliecake47 wrote: Sat Jun 08, 2024 7:56 am We are continuing to transition many different things now that we have been retired for a while. We have a very good handle on all costs (fixed, discretionary, charitable, gifting, etc.) but now we want to look at optimizing both of our fixed and equity holdings with a goal of reducing taxes. We have more than enough funds to carry our future, so the current task is about any methods to control taxes within our overall plan which also considers heirs.
- we have been reducing our tax deferred accounts each year thru Roth conversions
- current tax deferred is about $1,000,000
- taxable accounts are about $7,000,000
- taxable accounts are about 75% equity/25% fixed (of which 20% is tax exempt)
- we have some limitations in the taxable equity side due to unrealized gains
- we’re likely to take SS in about 1-1/2 years (about $85K current SS report)
- a total draw amount of about $150K per year for everything is our baseline goal. This is in a year or so after last Roth conversions are completed
- we would also like the flexibility to spend in excess of $150K per year on an infrequent basis

Currently the taxable account will yield around $170K, of which $55K is tax exempt. Along with the near future SS we have excess income that is not needed but is taxable. Any thoughts would be appreciated.
I am aware of the capital gains if moving any money out of your taxable accounts, as well as the current tax drag in those taxable accounts that you are considering trying to lower. That being said...

With your $7M currently in taxable, you could consider placing some of the taxable into Fidelity's Personal Retirement Annuity as it has no RMDs, taxes are only on the gains if and when you take it out, and with your amount the administrative wrap fee would be 0.1% + the underlying mutual fund fees. The S&P 500 fund (ER 0.1%), extended market fund (ER 0.13%), total US market (ER 0.12%), total international market (ER 0.17%), and total US bond market (ER 0.14%) funds are the lowest cost available funds within the variable annuity.

https://www.fidelity.com/annuities/FPRA ... y/overview

It would at least defer taxes on dividends/coupons if you were trying to get the current $170K income from the taxable account lower, and with no RMDs you could control when and if you need to take some out based on your comment of potentially needing more during those infrequent years.

CyclingDuo
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Re: Methods to Minimize Taxable Income in Retirement

Post by Artsdoctor »

calliecake47 wrote: Sat Jun 08, 2024 2:25 pm Thanks everyone for all the input and great suggestions. Agree the goal is to maximize returns, just looking for the best way to do that while minimizing taxes, since when we start taking SS, we won’t be using some of that income. We are aware of and are already doing most suggestions, so I feel good that we are of common mind there. Some great suggestions, we can’t do quite yet, because we’re not at RMD age for a couple more years, but I will place hold them.

I would like to find out more about the gifting shares that produce income to heirs now. Our kids are in well paying positions that put them in a higher tax bracket than we are currently so would that be the best overall strategy, because I feel like I’m just transferring the taxes to them? But, if we were to gift those shares to them now, how would that work with the basis on those funds? Do they get a step-up like with an inheritance or does the basis transfer as well?

We’re also interested in learning more about the BRK/b shares and other similar, non-dividend paying stocks or mutual funds of that type, or even higher risk investments. We had contemplated that but haven’t pulled the trigger. I will have to do more research there.
This is, more or less, what I was getting at with my questions above. Instead of focuses on the taxes, first choose your goals.

For example, are you contemplating giving your children money now to help them (or are you doing it to minimize taxes?)? If they're in federal and state brackets which are much higher than yours, and you would anticipate that to continue for a reasonable length of time, why would you transfer appreciated assets to them? As others have pointed out, they get your cost basis and they'd be paying taxes on the dividends each year. If you want to help them, you'd sell the assets with the highest cost basis and given them the cash.

Do you have any philanthropic plans? If so, you'd really want to look into a Donor Advised Fund. For those philanthropically inclined, they are terrific ways to off-load the most appreciated assets in your taxable account(s).

We all want to minimize unnecessary taxes, but you really want to focus on your non-tax related goals and then set out to make those goals happen in a tax-efficient manner.
Topic Author
calliecake47
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Re: Methods to Minimize Taxable Income in Retirement

Post by calliecake47 »

CyclingDuo wrote: Mon Jun 10, 2024 8:22 am
calliecake47 wrote: Sat Jun 08, 2024 7:56 am We are continuing to transition many different things now that we have been retired for a while. We have a very good handle on all costs (fixed, discretionary, charitable, gifting, etc.) but now we want to look at optimizing both of our fixed and equity holdings with a goal of reducing taxes. We have more than enough funds to carry our future, so the current task is about any methods to control taxes within our overall plan which also considers heirs.
- we have been reducing our tax deferred accounts each year thru Roth conversions
- current tax deferred is about $1,000,000
- taxable accounts are about $7,000,000
- taxable accounts are about 75% equity/25% fixed (of which 20% is tax exempt)
- we have some limitations in the taxable equity side due to unrealized gains
- we’re likely to take SS in about 1-1/2 years (about $85K current SS report)
- a total draw amount of about $150K per year for everything is our baseline goal. This is in a year or so after last Roth conversions are completed
- we would also like the flexibility to spend in excess of $150K per year on an infrequent basis

Currently the taxable account will yield around $170K, of which $55K is tax exempt. Along with the near future SS we have excess income that is not needed but is taxable. Any thoughts would be appreciated.
I am aware of the capital gains if moving any money out of your taxable accounts, as well as the current tax drag in those taxable accounts that you are considering trying to lower. That being said...

With your $7M currently in taxable, you could consider placing some of the taxable into Fidelity's Personal Retirement Annuity as it has no RMDs, taxes are only on the gains if and when you take it out, and with your amount the administrative wrap fee would be 0.1% + the underlying mutual fund fees. The S&P 500 fund (ER 0.1%), extended market fund (ER 0.13%), total US market (ER 0.12%), total international market (ER 0.17%), and total US bond market (ER 0.14%) funds are the lowest cost available funds within the variable annuity.

https://www.fidelity.com/annuities/FPRA ... y/overview

It would at least defer taxes on dividends/coupons if you were trying to get the current $170K income from the taxable account lower, and with no RMDs you could control when and if you need to take some out based on your comment of potentially needing more during those infrequent years.

CyclingDuo
Thanks. This is something I hadn't thought of. So as long as we don't annuitize it, we can withdraw the money at will, assuming the gains withdraw first, I will look into this more. Do you happen to know if this type of product gets a step-up in basis upon death to heirs?
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CyclingDuo
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Re: Methods to Minimize Taxable Income in Retirement

Post by CyclingDuo »

calliecake47 wrote: Wed Jun 12, 2024 6:19 pmThanks. This is something I hadn't thought of. So as long as we don't annuitize it, we can withdraw the money at will, assuming the gains withdraw first, I will look into this more. Do you happen to know if this type of product gets a step-up in basis upon death to heirs?
Step-up is not a feature of these products.
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aristotelian
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Re: Methods to Minimize Taxable Income in Retirement

Post by aristotelian »

I would not do Roth conversions while working unless you have a sabbatical or unemployment situation. You will be playing more in taxes now to save on taxes later.
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