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The tax planning ‘sweet spot’ in retirement

December 30, 2018

Every week, Simply Money’s Nathan Bachrach and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com

 

Scott and Cheryl from Warren County: We’re in our early 60s and just retired. Are there any tax moves we should be making? 

Answer: There’s definitely a “sweet spot” for retirees when it comes to tax strategizing – and the two of you just entered it. 

The window to which we’re referring is from the time you stop working to when you turn age 70½. Generally speaking, you’ll be in a lower tax bracket during this stretch since you no longer have a paycheck coming your way and you’re not yet forced to take RMDs, or Required Minimum Distributions, from retirement accounts like your traditional 401(k) and traditional IRA (which increase your taxable income). 

To take advantage of your lower tax bracket, you have a couple of potential options during this period:

  • Convert money in a traditional IRA to a Roth IRA: You have to pay taxes on this conversion, but the move could be worth it. Roth IRA money grows tax-free and earnings come out tax-free (as long as you’re at least age 59½ and have held the account for at least five years). Another bonus? Roth IRAs don’t have RMDs.
  • Sell long-term gains: If you own taxable investment accounts, you pay a different tax rate on gains in assets you’ve held longer than a year. This is called the “capital gains” tax, and it’s historically been lower than the “ordinary income” tax rate you pay on your retirement accounts. For example, in 2018, a married couple filing jointly who has an AGI (adjusted gross income) of less than $77,200 will pay a zero percent tax on long-term gains.
  • Look at your employee stock options: The same thinking applies here as with your taxable investment accounts. If you have long-term stock gains, selling when you have a lower AGI will result in a lower tax bill. 

Here’s The Simply Money Point: The span from when you retire to the time you turn 70½ is usually a great time to make some tax moves. But of course, any tax decisions need to be made in the context of your broader financial goals. Always work with a credentialed financial advisor and a trusted tax professional.

 

Brandon in Cheviot: I just inherited a significant amount of P&G stock from a family member who just passed away. Do I hold on to it? Sell it? What kind taxes would I be looking at? 

Answer: You seem to be looking at your newfound situation with a fairly practical eye, which is good. All too often, we see someone who just inherited stock from a family member let emotion dictate their actions – which doesn’t always end well. 

Deciding whether or not to sell this stock really comes down to your personal situation. Do you need the money for something? Can this money help you reach the broader goals you’ve (hopefully) laid out in a financial plan? 

The good news is you don’t pay any taxes for the mere act of inheriting the stock – you only pay taxes when you sell (assuming there are gains). If you do decide to sell, the ‘cost basis’ (the value used to figure out any tax loss or gain) gets ‘stepped up.’ This means you don’t pay taxes on the stock’s gains over your family member’s lifetime; instead, you’ll only pay taxes on the gains starting from the date of your family member’s death. Plus, inherited stock is always taxed at the more tax-friendly long-term capital gains rate (no matter how long you’ve held it). So, if you decide to sell right away, those two combined factors should make for a relatively low tax bill. 

Also keep this in mind: at Simply Money, we recommend that individual company stocks make up no more than 10 percent of your total investments. If this inherited stock takes you over the tipping point, that could be a sign to sell. 

The Simply Money Point is that you need to remember this money is now yours and should be viewed as a resource to assist you in achieving your financial goals rather than viewed as a family heirloom. Making a decision based on what’s best for you and your living loved ones is the greatest way to honor the legacy of your inheritance.  

 

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. 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, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.

 

Retirement Taxes