Intentional Tax Planning Can Increase Retiree’s Bottom Line

A place for everything, and everything in its place,” is a proverb often attributed to Charles Goodrich, a New England reverend of the early-mid 19^th century. Its application to savvy retirement planning includes not only the role of income, portfolio allocation and deductions, but how intentional tax management can similarly benefit spendable net income.

Tax management starts with the tax harvesting of non-qualified funds, and includes the uncovering of investment losses that can offset realized gains that Uncle Sam would otherwise claim as tax. By matching losses against gains, the retiree’s tax liability can decrease or may be negated.

Tax harvesting typically occurs in the fall, coincidental to a time of crop harvesting. It’s a time on the calendar when results for the majority of year are known and projections can be made, though subject to change.

While tax management is a broad topic, the impetus for tax harvesting comes from specific events and sources. Many taxpayers are surprised to learn that taxes can be due on mutual funds that have negative overall returns in a year. This occurred widely in 2015 when funds experience some gains in the individual holdings of a fund, though the fund itself delivered overall negative results. By reviewing your non-qualified fund holdings before December 31, funds with a loss can be sold by the investor to counter that gain.

Asset allocation is another application of the “a place for everything” philosophy.

For a diverse allocation, mutual funds and ETFs are popular choices. However, retiree investors should be aware of annual fees. Prospectuses generally address expense ratios but buyers should also seek out the fund’s statement of additional information for other expenses.

For conservative allocations, and depending on buyer suitability, fixed index annuities can be an answer. These insurance-backed instruments offer guaranteed lifetime income and an escalating account floor that locks in gains and protects against loss, even in poor-performing years.

For those who appreciate an element of speculation, oil and gas investments can create tax benefits through depletion allowances. Due to their relatively obscure nature, investor scrutiny and due diligence can be beneficial.

Retirement planning is hardly a DIY (do it yourself) exercise, and can have lasting consequences. Retirees are encouraged to engage a certified professional who can not only coach asset appreciation and preservation, but who can implement aspects of intentional tax management through tax harvesting.