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Retirement tax planning Q&A

You worked hard to save for retirement. Learn how you can potentially minimize the taxes you owe over your retirement years so you keep more of the money you've earned and invested.

In this article, we’ll answer the following questions:

  1. What types of retirement income are taxable vs. non-taxable?
  2. After I stop working and my income is potentially lower, how can I take advantage of 0% or low tax rates?
  3. What is an RMD, and how does the RMD tax penalty work?
  4. How can I reduce my taxable income while supporting charitable efforts?
  5. What are some tax-saving moves I can make before age 72?

What types of retirement income are taxable vs. non-taxable?

Taxable

Non-taxable

Social Security – up to 85% of your Social Security benefits may be taxable depending on the amount of income you have from other sources Social Security – if your total modified adjusted gross income is below certain limits
Withdrawals of earnings and pre-tax contributions from IRAs, 401(k)s*, and other retirement plans

*Special rules apply to appreciated employer securities in qualified retirement plans. 
Withdrawals of after-tax contributions from 401(k)s, IRAs and other retirement savings plans (whether withdrawals are considered to be from after-tax or pre-tax contributions and earnings is based on the law and will depend on ordering rules applicable to the account)
Pension payments Qualifying withdrawals from Roth 401(k)s, Roth IRAs, and Roth 403(b)s

 

After I stop working and my income is potentially lower, how can I take advantage of 0% or low tax rates?


During the time between when you stop working and when you begin taking required minimum distributions (RMDs) at age 72, you could consider these opportunities with your financial advisor:

 

  • Standard deduction shelter. If you’re able to cover expenses with savings or other cash accounts, consider taking advantage of the standard deduction ($12,950 single; $25,900 married filing jointly in 2022). Depending on your other income, you could use the standard deduction to shelter up to $12,950/$25,900 withdrawn from a taxable account such as a 401(k) or IRA every year without paying federal income tax on that money. Income above the standard deduction amount starts being taxed at the 10% rate.  If you have started taking Social Security benefits those amounts should be considered in the calculation because, depending on the amount of Social Security benefits, some of those benefits may be taxable as well. 
  • 0% long-term capital gains tax rate. While your income is lower before RMDs begin, you may be eligible to realize gains at the 0% long-term capital gains rate. Taxable income limits applicable to the 0% long-term capital gains are  $41,675 for those filing as single and $83,350 for those who are married filing jointly in 2022. The calculation includes the net realized gain in determining the amount of taxable income used to determine what qualifies for the reduced rate.


What is an RMD, and how does the RMD tax penalty work?


A required minimum distribution is the minimum amount you must withdraw annually from your retirement account when you are age 72 and older. It is recalculated each year. If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty equal to 50% of the amount not taken. Being aware of this ahead of time can help you avoid the penalty.

The simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they turn age 72 and continue RMDs by Dec. 31 every year after that. You can take more than the required amount — and people often do so. While the extra withdrawals don’t count toward RMDs for future years, they do reduce the base amount from which future RMDs are calculated.

Roth IRAs are exempt from RMDs while the owner is alive, but Roth 401(k) and Roth 403(b)s do have RMDs unless they are rolled over to a Roth IRA.


How can I reduce my taxable income while supporting charitable efforts?


If you’re interested in providing charitable support, donating to a non-profit organization with a qualified charitable distribution (QCD) can help you achieve that goal. A QCD is a nontaxable distribution from an individual retirement account (IRA) directly to an eligible charity. You must be at least 70.5 years old to take advantage of the QCD strategy. For taxpayers who have reached age 72, the QCD can be used as part, or all, of your RMD, removing the otherwise taxable RMD from your income, if done correctly. QCDs do not prevent a taxpayer from itemizing deductions, for the tax rules around QCDs talk to your tax professional. 


You could also consider donating appreciated stocks or assets. If you donate appreciated stock that you’ve held for more than a year, then you’ll generally be able to claim a potential charitable tax deduction for the full fair market value of the stock. This approach saves paying the capital-gains tax that would result if you instead sold the stock and donated the cash.


What are some tax-saving moves I can make before age 72?


Because many retirees are in a lower federal income tax bracket before required minimum distributions (RMDs) begin at age 72, they have an opportunity to manage the impact of taxes on their income.


If you’re retired and have yet to turn 72, here are few moves to consider

 

  • Converting taxable assets to a Roth IRA: If you expect to be in a higher tax bracket when your RMDs begin, consider converting pre-tax IRA investments to a Roth IRA before then. Think about your ability to pay the taxes on the conversion as well as your timeline before you would need to access the Roth IRA. Converting to a Roth IRA generates a tax bill, but it could be less expensive now because of your temporarily lower income tax bracket— and the temporarily lower federal income tax brackets that are set to expire after 2025.
  • Selling investments that have appreciated. The tax rate on long-term capital gains — assets held beyond one year — is based on your taxable income. If you have stocks, mutual funds, bonds or other taxable investments, it may make sense to sell appreciated long-term investments while your taxable income is lower. Some, or all, of net long-term capital gains may be taxable at the 0 percent capital gains tax rate if your total taxable income (including the realized gains) falls below the threshold for your filing status. Talk to your tax professional to see if this applies to you. 
  • Redeeming older savings bonds. While you’re in a lower tax bracket, you may want to cash in US savings bonds issued when interest rates were higher. If you have bonds issued more recently, talk to your advisor about whether to hang on to them, given rising interest rates.
  • Exercising employee stock options. If you own employee stock options, exercising them while you’re in a lower tax bracket may benefit you — especially if the current stock valuation is high.
  • Revisiting your withdrawal strategy. Because withdrawals from tax-deferred accounts are neither penalized nor required between ages 59 1/2 and 72, you have more flexibility and control with your withdrawal strategy for retirement savings. Your advisor can help you make a plan to determine how much money to withdraw each year to meet your goals while managing your tax liability across the years.

 

The benefits of working with a financial advisor and tax professional

Your advisor can help you balance your financial priorities with tax implications by helping you create a lifetime plan that meets both your personal and financial goals. Because your Ameriprise financial advisor understands your finances, he or she may also be able to recommend a tax professional for you. Working together, your Ameriprise financial advisor and your tax professional can help structure your investments and retirement distributions for tax efficiency.

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Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

There are risks associated with fixed income investments, including credit risk, market risk, interest rate risk and prepayment and extension risk. In general, bond prices fall when interest rates rise and vice versa. This effect is more pronounced for longer-term securities.

Withdrawals from traditional IRAs, 401(k) accounts, and other pre-tax investments prior to age 59½ are generally subject to a 10% IRS penalty on taxable earnings, though exceptions may apply.

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

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