Video: Manage Your Income Levels

Thanks once more for your interest in our planning videos. This is Kieran Byrne, I'm the founder and lead adviser here at MK Byrne & Co.

In this video, we'll discuss how you can manage your taxable income once you cross into your higher-income retirement years.

First, why don't we review the particulars of this hypothetical client scenario:

The clients are a married couple who plan to start Social Security at age 70, and are required to take withdrawals from their IRA accounts at age 73.

As we mentioned in our previous video, the clients are interested in continuing to sell highly appreciated company stock, they want to sustain their charitable giving efforts throughout retirement, and they'd like to minimize the taxes due on their large IRA accounts.

First Planning Idea

The first planning move is to use the age 69 tax year to sell additional company stock at favorable tax rates.

In this scenario, the client recognizes that their income will rise in the years ahead due to Social Security and their required IRA distributions. However, at age 69, the client has one final year to realize $100,000 in long-term stock gains at a 0% federal tax rate.

So similar to the example in the prior video, no federal tax would be paid on $100,000 of stock gains. As a point of comparison, had the client waited just 1 year to sell this stock at age 70, there would be $15,000 in federal taxes due on that same $100,000 of stock gains.

Second Planning Idea

Our next planning idea involves the use of Roth IRA conversions at ages 70, 71, and 72, as these Roth IRA conversions would occur at a favorable 22% federal tax rate and then grow tax-free thereafter.

However, when we execute these conversions, we want to focus on keeping the client's New Jersey gross income below $100,000 as this would preserve the full New Jersey retirement income deduction, which essentially eliminates any New Jersey tax liability.

Now you may be wondering how someone's income can be over $170,000 for federal tax purposes, and only $100,000 in New Jersey. The answer should be a pleasant surprise. New Jersey does not tax any of your Social Security income.

Third Planning Idea

The third planning idea is making charitable gifts directly from the client's IRA account which the client is eligible to do after they turn 70.5 years of age.

There are two key benefits to this approach.

First, under the current federal tax code, it's very difficult to realize a tax benefit on your charitable giving efforts as most taxpayers no longer itemize their tax deductions. However, charitable gifts from IRA accounts are not treated as an itemized tax deduction. Such gifts are treated as a dollar-for-dollar reduction of an otherwise fully taxable IRA distribution.

So, let's say you take $35,000 of IRA distributions in a given year, which includes $5,000 in gifts to charity. On your tax return, you would report only $30,000 of taxable IRA distributions. Therefore, you receive the equivalent of a $5,000 tax deduction in the form of excluded income.

Had you simply written the $5,000 check from your bank account, you would likely receive no tax benefit at all.

The second benefit is that making gifts directly from an IRA helps to lower your overall income level as the gift is treated as excluded income in this scenario.

In this scenario, at age 73, the client lowers their income level from $230,000 to a $190,000 by making $40,000 of charitable gifts directly from their IRA account. In addition to the $9,000 in tax savings, by lowering their income below the $194,000 level, the client is able to avoid an increase in their Medicare premiums.

Fourth Planning Idea

The last planning idea occurs at age 74 when the client invests a portion of their investment savings into a low-cost, non-qualified annuity contract, as any funds invested in a non-qualified annuity are only taxed when the funds are withdrawn, and not when the interest of dividends are paid each and every year.

So why does this planning idea make sense?

As we can see, over the age 69 to age 73 time period, the client's investment income steadily grows. By the time the clients start Social Security and their required IRA distributions, this high level of investment income drives the client's total income up to levels where more federal taxes are due, Medicare premiums increase and valuable New Jersey tax benefits are lost.

By taking a portion of their savings and investing it into a low-cost annuity-- with an emphasis here on low cost-- the client can dramatically reduce the level of investment income that is taxed each year, which helps the client to avoid the negative tax consequences that often arise when a client required IRA distributions commence.

These planning strategies, and variations of these strategies, are just a few planning ideas that might make sense for clients as they enter their higher income years of retirement.

Ultimately, the right tax strategies for any client will be driven by each client's unique financial details and retirement objectives.

However, we hope these examples help to highlight some of the tax planning opportunities that exist for those retirees who proactively manage the ongoing tax liabilities.

Thanks once more for viewing our planning videos.