Tax Strategies May Generate a Greater Cash Flow

The taxman cometh. He comes for everyone and he doesn’t discriminate. The retiree, the senior, the elderly and the uber-aged are in the crosshairs of his target. Uncle Sam is not your uncle—he’s the revenuer from old. His collection agency garnishes billions of dollars a year. The only way to defeat him is to learn the tax system that defends him. And why? Because taxes are the biggest annual budget item in retirement. And if you lower your tax bill, you’ll be able to keep more of your own money.

For most seniors, managing your distributions in retirement could yield 10 to 15 percent more spendable income every year. Learning the basics of the tax system could be the best education course to take in retirement. Remember, an uneducated retiree is generally paying unnecessary taxes to the government. The tax code is so convoluted and deliberately correlated to capture revenue. So learning how to protect your income can often result in more money spend.

One of the first tax items to consider is tax harvesting winners and losers from your mutual funds those that are not in your retirement plan. In 2015 many retirees lost money in their mutual funds. Nevertheless, some seniors still paid taxes. It’s bad enough that you lost money, but to pay taxes just adds insult to injury. So tax harvesting of non-qualified mutual funds may be a solution to lower your tax bill.

It’s amazing to note many retirees believe their tax exemptions and deductions will be enough to shelter their Social Security income from taxation. That could be true for those who have no other income sources. But the vast majority of seniors have qualified retirement plans, non-qualified investments and savings income, as well as specific tax-free municipal bond holdings. But in the end, all these forms of income are includable in the provisional income test to determine your Social Security benefit taxation.

2) Charitable giving is always a good place to start when creating a tax reduction strategy. Just make sure the charity you contribute to is an IRA approved non-profit organization.

3) Many retirees have become entrepreneurs and started small businesses. This is a good time to consider end of the year spending and increase your deductions.

4) Another tax strategy is to defer qualified plan distributions until age 70½ when required minimum distributions (RMDs) must be disbursed. On one hand, the deferral allows your investments to continue to grow tax-deferred. On the other, the accumulated build up increases your RMDs and may inadvertently push your income threshold into tier-two taxation of your Social Security benefits. It’s a catch 22 for most retirees.

But an individual can defer 25 percent of qualified plan monies (not to exceed $125,000) into the future as far out as age 85. A married couple may be able to defer $250,000 to age 85 and reduce their RMDs and the amount exposed to tax for at least 15 years. That tax savings could be significant, especially if deferring your RMDs drops you a tier or two in the Social Security tax brackets.

If you’re inclined to help your family financially, you may want to consider a stretch IRA. This strategy employs two lives, sometimes with different generations. The RMDs are factored on the basis of the younger of the two and can substantially lower the RMD obligation to the current retiree. And if you’re charitably inclined, you can donate your IRA monies direct to your IRS-approved non-profit organization as a Qualified Charitable Distribution from an IRA. The annual amount is $100,000 for individuals and $200,000 for a married couple.

These are just some basic strategies you can employ to control your taxes during retirement and keep more of your money back in your pocket where it belongs.