It's almost 2023.
And while you're snacking on your favorite Christmas treats (my favorite is Little Debbie snack cakes), carve out some time to check things off your financial to-do list. December 31 marks the final day for most strategic tax decisions you can make in the 2022 tax year.
Don’t let these opportunities pass you by!
Today, we put together a list of six unique tax considerations we think retirees should review before the sun sets on another year.
1. Remember Your New Standard Deduction
Deductions lower your income and, thus, your tax burden. In 2017, Congress doubled the size of the standard deduction to simplify the tax filing process and ultimately lower taxes for more people.
While this change enabled families to deduct more without itemizing, it also made taking advantage of common itemization opportunities, like charitable giving, more challenging.
In 2022, the standard deduction for married couples filing jointly rose to $25,900, up $800 from the prior year. If you’re filing as single or separate from your spouse, that number increased to $12,950, up $400. Heads of households can deduct $19,400, up $600.
But, if you are over 65, you can deduct even more than the typical limits.
Any taxpayer over 65 can add $1,400 to their standard deduction—if you’re married, each spouse can claim that extra amount. If you file as single or head of household, that number jumps to $1,750. Should you or your spouse be blind, you may double the allotted amount.
Retirees often overlook this extra standard deduction. But fully leveraging it opens up an excellent opportunity to manage your tax liability in years where you don’t itemize deductions.
When would you itemize?
- You have significant medical expenses that exceed 7.5% of your AGI.
- You’re able to deduct interest from loans like mortage, home equity line of credit, etc.
- You bunched several years’ worth of charitable donations into a single year.
2. Let Your Spouse Contribute To Your IRA
It's common for married couples to retire at different times. If one person is retired and the other is still working, the working spouse can contribute to the retired spouse's IRA. This strategy is known as a spousal IRA and can help the non-working spouse continue to grow and maintain a nest egg.
The working spouse can contribute to the retired spouse’s account if:
- You and your spouse file taxes jointly.
- You remain within the IRS “total compensation” rules.
Per the IRS, you can contribute the smaller of these two amounts: the annual IRA contribution limit ($7,000 if at least 50) or your household’s annual gross income reduced by any contributions you made to an IRA.
Let’s illustrate this point with a story.
Saul and Suzzie are married and file their taxes jointly. Saul earns $70,000 as a project manager at a small company, and Suzzie retired from teaching last year and isn’t earning any income.
Assuming they are both 50, Saul maxes out his traditional IRA contribution at $7,000. He can also contribute $7,000 to Suzzie’s IRA since that number is smaller than their gross income minus his IRA contribution ($70,000 - $7,000 = $63,000).
3. If You're Newly Retired, Consider A Roth Conversion
Roth IRAs are popular retirement accounts, with good reason. The contributions you make are taxed on the way in, meaning you (or your heirs) don't pay taxes on the way out (aka qualified distributions).
You can convert nearly any traditional retirement account into a Roth IRA. As long as you can pay taxes on the conversion upfront, you’ll enjoy decades of tax-free growth, more investment options, and avoid required minimum distributions.
If you do this conversion early enough in retirement, you may minimize the overall tax burden. In other words, if you convert before social security, pensions, or required minimum distributions start, your taxable income and the tax bill from the conversion will likely be at their lowest.
4. Take Your Required Minimum Distributions
Once you turn 72, you must take required minimum distributions (RMDs) from your retirement accounts (401k, IRA, etc.). If you forget, you'll face a 50% penalty on the amount you were supposed to withdraw, plus income tax on the distribution.
Calculating your annual RMD amounts is relatively simple, but where to withdraw them can be a little more involved.
401(k)'s are straightforward. Once you retire, the plan custodian will calculate your amount and send it to you.
With traditional and rollover IRAs, you have more options. Again, the account custodian will calculate the amount for you, but you have choices when it comes to withdrawing the money:
- Take the RMDs from each account.
- Combine and withdraw the overall total RMD from one account.
- Mix and match different amounts from several accounts that, when added, equal the total RMD.
It’s important to take a strategic approach to your RMDs as there could be ways to lower them, like donating some (or all) of them to charity via a qualified charitable distribution, rolling over some funds into a Roth IRA (which isn’t subject to RMDs), and withdrawing from these accounts before RMDs kick in.
We can work together to create an RMD plan that maximizes your money and minimizes the tax impact.
5. Clean Up Your Investments
As you wrap up the year, it's a perfect time to evaluate your portfolio—what's working? What isn't? You may have made several investments throughout the year, so now is your chance to see how they performed.
For example, you may realize that you need to start selling shares of certain asset classes (such as stocks) that now comprise a higher percentage of your allocations than your target mix. Doing this will rebalance your portfolio to your ideal risk levels and keep you adequately diversified.
Tax loss harvesting is another strategy that can help retirees maximize their returns. This means selling securities at a loss to offset gains (you can deduct up to $3k in ordinary income and roll over additional losses into the following year).
6. Donate To Charity
Charitable giving is an integral part of your retirement strategy. Once you turn 70.5, you can make a qualified charitable distribution (QCD), which is a donation from your IRA to a qualified public charity that would otherwise be taxable. QCDs can be an important part of your overall tax-planning strategy.
Retirees can benefit from this strategy as they may donate all or a portion of their RMDs to charity by implementing this strategy. It’s also helpful that you don’t need to itemize to take advantage of this tax-saving opportunity.
Retirement is not the time to sit back and relax from a tax and investing perspective. If you've already retired, you may have more strategic tax opportunities than you think!
Whether cleaning up your investments or converting some money into a Roth IRA, plenty of things may remain on your 2022 checklist. But don't worry; we've got you covered!
We’d love to help you find confidence in your money and ring in 2023 with optimism.