Why You Need Short and Long-Term Tax Planning
When it comes to tax planning, retirees can’t only think about the short term or the long term. They must consider both for a financially secure future. To stay in sharp financial shape during the Golden Years, retirees need to understand the difference between annual and long-term tax planning, as well as the benefits of each in regards to retirement.
Annual Tax Planning for Retirees
Yearly tax planning, or coming up with your strategy during autumn of each year for the following tax season, is important for uncovering attractive tax opportunities. For example, you can realize capital losses, or an investment that you sell or exchange, in order to reduce your income tax bill. You can also create a capital loss carryover for the next year (something you can do indefinitely). Annual tax planning is also a good time to withdraw funds from an IRA or modify to a Roth IRA for tax purposes. You can get away with paying minimal taxes on these accounts when deductions increase and income streams may be low.
Tax Planning for the Long Horizon
Annual tax planning simply isn’t enough for today’s retirees. Long-term tax planning is imperative for retirees in light of changing tax brackets and a new White House Administration. The first step in planning for the long horizon is to establish your taxable income for the next five to 15 years. This is your “horizon.” The longer the time frame, the better you can adapt to the progressiveness of the new tax code. Plan to avoid higher tax brackets each year, and employ strategies such as:
- Harvesting losses in high-income years and gains in low-income years.
- Adding to traditional IRAs in high-income years and Roth IRAs in low-income years.
- Creating charitable lead trusts and charitable remainder trusts.
- Strategizing in terms of life insurance
- Performing Roth IRA conversions
Long-term tax planning for retirement basically comes down to minimizing your taxable income in high-income years and increasing income in low-income years. With factors to consider such as a broken pension system and longer lifespans, tax planning is becoming more complicated by the year. You will likely need a tax advisor to help you keep your taxable income below the net investment income tax threshold level each year to smooth your retirement income.
The Takeaway
Long-range tax planning is the key to knowing how much to withdraw each year and how to coordinate your sources of income, while annual tax planning helps you discover opportunities you might not recognize with long-term planning alone.
Investment advisory services are offered through Virtue Capital Management, an SEC Registered Investment Advisor. Macino Financial and VCM are independent of each other. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration is not an endorsement of the firm by the Commission and does not mean that the adviser has attained a specific level of skill or ability. All investment strategies have the potential for profit or loss. Changes in investment strategies, economic conditions, contributions or withdrawals may significantly alter a portfolio’s performance. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. Past performance is no guarantee of future success. We cannot guarantee that a portfolio will match or outperform any particular benchmark. None of the content should be viewed as an offer to buy or sell, or as a solicitation of an offer to buy or sell the securities discussed. Information on this website does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. A professional adviser should be consulted before implementing any of the options presented.
David Macino and/or Macino Financial Services are not affiliated with or endorsed by Medicare, Medicaid or any other government agency.
