As you help clients plan for retirement, considering tax and distribution flexibility may help them avoid higher tax brackets and reduce unintended taxes or Medicare surcharges. A more tax-efficient retirement income plan can add years to the life of a retirement portfolio, improve levels of after-tax income and could add to the estate value for heirs. Consider these tips to help clients get started.
Diversification of account types
Using a mixture of tax-deferred, taxable and tax-free accounts could offer more tax flexibility in retirement. One example is splitting qualified plan contributions between Roth and traditional 401(k) accounts.
Roth conversions could help provide greater income flexibility in retirement, lower future required minimum distributions (RMDs), avoid costly Medicare premium surcharges and more. Consider the years after retirement (when clients may be in a lower marginal tax bracket) and before age 72 as an ideal time for conversions.
Net unrealized appreciation (NUA)
Special rules may allow plan participants to avoid paying ordinary income tax on gains from employer stock that's held in their qualified plan.
Health savings account (HSA)
Take advantage of tax-free distributions from HSAs to pay for qualified medical expenses.
While the primary purpose of life insurance is death benefit protection, it can also create supplemental tax-free income, which may reduce the death benefit amount; withdrawals to basis and loans are tax free if the policy isn't a modified endowment contract (MEC).
If your client has the financial flexibility, delaying Social Security benefits until later in retirement may generate a greater lifetime benefit.
The higher their retirement income, the more your clients may pay for Medicare premiums. Look for income sources that aren't included in their modified adjusted gross income (MAGI), such as life insurance or an HSA.
Selling capital assets to generate retirement income may result in less taxes owed versus an investment product with ordinary income taxation. In 2024, married couples filing jointly with a taxable income amount of $94,050 or less will have a capital gains tax rate of 0%.
Qualified charitable deduction
For clients who don't have a financial need to take their RMDs, donating to a favorite charity directly from an IRA account could help reduce income taxes.
Tax Cuts and Jobs Act
At the end of 2025, several time-limited provisions of the Tax Cuts and Job Acts of 2017 will sunset, including the higher standard deduction and lower marginal tax brackets in place today. Consider any benefits of making tax-efficient changes prior to this expiration.
Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.
This content is provided for informational purposes only and should not be construed as investment, tax or legal advice or a solicitation to buy or sell any specific securities product. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.
Federal income tax laws are complex and subject to change. The information in this brochure is based on current interpretations of the law and is not guaranteed. Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.
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