Video: Maximize Your "Low-Income" Years

Welcome, thanks for your interest in our planning videos. This is Kieran Byrne, I'm the founder and leader advisor here at MK Byrne & Co.

In this video, we'll discuss how you can maximize your tax savings in those lower-income years that commonly occur in the first few years of your retirement.

First, why don't we discuss the particulars of this hypothetical client scenario.

The clients, a married couple, plan to retire at age 64 but defer Social Security until age 70.

In terms of planning objectives, the client would like to sell a sizable amount of their highly appreciated company stock. They'd like to sustain $10,000 of charitable giving each year, and they're concerned that their large IRA balances might cause some tax problems in the future.

First Planning Idea

The first planning move is to prefund the next 6 years of charitable giving by taking a $60,000 tax deduction at age 63, when the charitable deduction will offset income taxed at the 32% tax rate. This, of course, dramatically increases the client's tax savings from their charitable giving efforts vs. giving smaller amounts each year, and doing so, in lower income years.

In this situation, we'd suggest that the client gift highly appreciated company's stock to a donor-advised charitable fund as a gift of stock helps to reduce the client's stock holdings without the need to sell stock and realize a taxable gain. Additionally, by using a donor-advised fund, the client can take the full $60,000 tax deduction in their final high-income year while still retaining the ability to direct the funds towards specific charities in future years.

Second Planning Idea

Next planning move is to use the age 64 and age 65 tax years to sell substantial amounts of company stock at favorable tax rates. At age 64 and age 65, the client realizes a $170,000 in long-term stock gains at a 0% federal tax rate. Yes, that's right, no federal taxes are paid on $170,000 of stock gains.

As a point of comparison, had the clients sold this stock at age 63, there'd be about $32,000 in federal taxes due on that same $170,000 of gain.

Third Planning Idea

Our third planning idea involves funding the clients annual spending need at the lowest possible tax rates. We do this at age 66, age 67, and age 68 by taking $250,000 of elective IRA withdrawals at a 12% federal tax rate. However, the client still needs additional funds to cover their spending. To do so, we would elect to take long-term stock gains at a 15% tax rate which is more favorable than paying a 22% tax rate on additional IRA withdrawals.

Over 3 years, this 7% difference in tax rates, will create approximately $10,000 of additional tax savings.

Fourth Planning Idea

The last planning idea would apply to clients who expect to pay higher tax rates in the future due to higher levels of future income or an expectation that Congress will end up raising tax rates in the future.

In such a scenario, we would use an IRA to Roth IRA conversion, which essentially converts a specific amount of IRA funds into permanently tax-free Roth IRA funds by paying taxes on those funds in the current tax year.

For this client's situation, we highlight a few key income levels that would want to be aware of prior to executing any Roth IRA conversions. These levels include a $194,000 and $246,000 of adjusted gross income, which are levels in which the client would see a sizable increase in their Medicare premiums as a result of their higher income level

We also want to monitor a client's proximity to the 24% tax bracket where a client may not want to convert additional IRA funds.

These planning strategies, and variations of these strategies, are just a few planning ideas that might make sense for clients in those lower income years early on retirement.

Whether or not these specific strategies apply to you, we hope these examples help to highlight the significant tax planning opportunities that exist for new retirees.

Thanks again for your interest in our planning videos.