Tax Strategies for New Retirees: Avoid These Tax Mistakes

You’ve worked for decades to build your retirement savings, now, how do you make sure taxes don’t eat away at it?

Without the steady paycheck you’ve relied on for decades, managing your tax burden becomes essential to preserving your wealth and helping to ensure your retirement savings last.

At Pinnacle Advisors, we believe in a collaborative approach to financial planning, all at the same table, all on your side.

With offices in Ohio and Florida, we help retirees navigate the complexities of tax planning so they can enjoy their golden years with peace of mind.

Here are some key tax strategies every new retiree should consider.

1. Understand Your Tax Brackets and Income Sources

In retirement, your income will likely come from multiple sources:

Social Security, pensions, retirement accounts, and possibly investment income.

The key is knowing how these sources are taxed and strategically withdrawing funds to stay in the lowest possible tax bracket.

For example, Social Security benefits can be taxable depending on your total income.

If your combined income (which includes half of your Social Security plus other income) exceeds $25,000 for individuals or $32,000 for married couples, you may owe taxes on up to 85% of your benefits.

Smart withdrawals from tax-advantaged accounts can help manage this impact.

For example, drawing from a Roth IRA instead of a traditional 401(k) could help keep your total income lower and reduce taxable Social Security benefits.

2. Strategic Withdrawals from Retirement Accounts

Different retirement accounts have different tax treatments.

Withdraw too much from the wrong one, and you could end up with a hefty tax bill.

Here’s a general guideline:

• Taxable Accounts First: Use funds from brokerage accounts first, since long-term capital gains are taxed at a lower rate than ordinary income.
  

• Tax-Deferred Accounts Next: After taxable accounts, withdraw from traditional IRAs and 401(k)s. Remember that Required Minimum Distributions (RMDs) begin at age 73, so plan accordingly.
  

• Tax-Free Accounts Last: If you have a Roth IRA or Roth 401(k), these withdrawals are tax-free and can be preserved for later years.

By strategically choosing which accounts to pull from each year, you can help to reduce your overall taxable income and potentially lower your tax bracket.

3. Consider Roth Conversions

A Roth IRA conversion allows you to move funds from a traditional IRA or 401(k) into a Roth IRA.

The catch?

You’ll pay taxes on the amount converted upfront.

However, if done strategically, during a year when your income is lower, you can pay less tax now and enjoy tax-free withdrawals later.

A good time for a Roth conversion is before RMDs begin or during years when your income is lower.

We help retirees determine the optimum time to convert, so they pay less in taxes now and enjoy tax-free income later.

4. Be Mindful of Required Minimum Distributions (RMDs)

Once you turn 73, the IRS requires you to start withdrawing money from traditional retirement accounts. These withdrawals are taxed as ordinary income, which can push you into a higher bracket.

To minimize the impact of RMDs:

• Consider taking withdrawals earlier to spread out the tax liability.
  

• Use Qualified Charitable Distributions (QCDs), which allow you to donate up to $100,000 annually from your IRA directly to charity, tax-free.

5. Take Advantage of Tax Credits and Deductions

Retirees may qualify for valuable tax breaks, including:

• The Standard Deduction: If you're 65 or older, you get a higher standard deduction, $15,700 for single filers and $30,700 for married couples in 2024.
  

• Medical Expense Deduction: If your medical expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct them. Keep track of doctor visits, prescriptions, and even long-term care costs.

6. Manage Capital Gains and Investment Taxes

Selling investments? Be aware of capital gains taxes.

If you've held assets for more than a year, they’re taxed at lower long-term rates (0%, 15%, or 20%, depending on your income).

One option is tax-loss harvesting, which involves selling investments at a loss to offset capital gains elsewhere in your portfolio, working to reduce your tax liability.

7. Consider Moving to a Tax-Friendly State

If you’re considering relocating, take state taxes into account.

Florida, for instance, has no state income tax, making it attractive for retirees.

Ohio, on the other hand, does not tax Social Security benefits but does tax other retirement income.

If you're planning a move, Pinnacle Advisors can help you assess the tax implications and make an informed choice.

Plan Now, Enjoy More Later

Taxes in retirement don’t have to be overwhelming.

With proper planning, you can work to keep more of your hard-earned money and make the most of your retirement years.

At Pinnacle Advisors, we take a proactive approach, bringing your financial planner, tax professional, and estate advisor all at the same table, all on your side.

Let’s work to make sure your retirement is everything you’ve planned for and more.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Pinnacle Advisors [“Pinnacle”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Pinnacle. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Pinnacle is engaged, or continues to be engaged, to provide investment advisory services. Pinnacle is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Pinnacle’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.pinnacleadvisors.com. Please Note: Pinnacle does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Pinnacle’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Pinnacle client, please contact Pinnacle, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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