Smart Year-End Tax Tips to Reduce Investment Taxes in Retirement (EP.181)

0:27We all need to make smart decisions with our money. Many people are thinking about their finances, holiday budgets, charitable donations, and yes, taxes. Nobody enjoys paying taxes, but with the right planning, you can reduce the amount you owe and keep more of your hard-earned money working for you. In today's episode, I want to focus on a critical area of tax planning, and that's your investment portfolio. Specifically, we'll talk about how to think strategically about taxes so that you're making the most out of your money, not just for this year, but for years ahead. Taxes can feel overwhelming, and it's tempting to put off dealing with them.

1:06Some strategies even promise zero tax outcomes by deferring taxes into the future. But as appealing as that sounds, it's important to understand what you're signing up for and how it fits into your larger financial plan. So let's start with some key considerations that I think you need to be thinking through before pursuing or evaluating any given tax strategy. So for starters, the obvious one are your goals and your priorities. What matters most to you? Do you want to spend your retirement traveling? Do you want to buy a second home? Do you want to leave a legacy for your family? Understanding your priorities is the foundation of effective tax planning.

1:46And then you want to think about anticipating future expenses. In retirement, you often see some unexpected costs such as health care and long-term care, and your portfolio should be positioned to handle emergencies without triggering a large and unnecessary tax bill. A third consideration, and I've already sort of referenced it, is your legacy plans. Because if you don't plan to use all your assets during your lifetime, thinking about how you want to pass them on can really impact how you might or might not choose to do strategies like charitable giving or like inheritance planning that could significantly impact your tax situation.

2:25Fourth consideration, know the rules. Look, deferred taxes don't disappear. They're simply delayed. When you sell an asset, taxes on capital gains will come due, but you should be aware of the rules around inheritance, such as the step up in basis, which can offer tax benefits to your heirs, but it's also important to understand how your estate is set up and where your assets reside because some things may not be eligible for a step-up in basis. Other things might get taxed differently when your heirs start to withdraw them. Lastly, even though this is a big tax conversation, I do think it's important to remember that you shouldn't let taxes dictate your portfolio.

3:05I mean, taxes are super important, but if they were to drive every investment decision, you ultimately wouldn't end up with the type of diversified portfolio that could align with your goals. And that is really what ought to outweigh the benefits of being hyper-focused on tax minimization. And it's not about paying the least amount in taxes. It's about keeping the most amount of money yourself after taxes. I think these considerations are helpful in just talking about some high-level ideas that may or may not apply to you in your situation. When we think about year-end tax planning, and we have these considerations I've mentioned at top of mind, when it comes to timing around taxes, it isn't about saving money in the short term.

3:49It's about making smart decisions that set you up for long-term success. So whether you're nearing retirement, already retired, or building wealth for the future, knowing how and when to take action on taxes can make a significant difference. So I'd like to just explore six strategies that maybe will generate some ideas for you and might be a consideration for you to think about here at the end of the year. The first one is to capitalize on low tax periods. Throughout your life, there will be natural fluctuations in your taxable income, which creates opportunities to reduce your tax bill. For example, in retirement, many people see their income drop, which may put them in a lower tax bracket.

4:31And this is what creates a prime opportunity to realize capital gains or withdraw from tax deferred accounts at a lower tax rate. On the flip side, if you're in a high income earning phase, you might want to focus on strategies like deferring gains or contributing to tax advantaged accounts to reduce your current tax liability. I do think it's important to be proactive about legislative changes. If there's a chance that tax rates will increase due to new laws, the key here is just understanding your current tax bracket and anticipating how it might change over time. And then by doing so, you can ensure that taxes take the smallest possible bite out of your wealth.

5:10A second strategy that's often coming up in year-end conversations is harvesting losses and gains strategically. Tax loss harvesting is a very powerful tool for reducing taxable income by selling investments at a loss to offset gains. Now, this strategy isn't just about avoiding taxes. It's really about maximizing long-term returns. For taxable accounts, you can use losses to offset both realized gains and up to$3 ,000 of ordinary income per year. Meanwhile, tax gain harvesting realizes gains intentionally when in a low tax bracket, and that can lock in profits with minimal tax impact. And to further this tax-savvy rebalancing of sorts, you can even reinvest the proceeds in similar investments to maintain your desired asset allocation.

5:56Now, we tend to see that these strategies work best when they're applied consistently and in alignment with your broader financial goals. The same is true of this third idea, which is Roth conversions, which really I think everybody understands is a very tax-efficient retirement strategy. In case you're not familiar, Roth conversions allow you to move assets from a traditional IRA or 401k into a Roth IRA, paying the taxes upfront in exchange for the tax-free growth and withdrawals later. Now, while the strategy requires careful planning, it can be particularly effective when you expect tax rates to rise in the future.

6:32And once the money is in the Roth account, it allows you to withdraw funds without affecting your taxable income, which gives you so much flexibility in managing your tax exposure during retirement. But also when you think about legacy, when you inherit an IRA and you're required to take all the money out within 10 years, that's a lot of ordinary income that you are going to be recognizing. Whereas if you're inheriting a Roth account, even if you were required to take the money out quickly, there isn't going to be any impact to your ordinary income. So you can kind of see how these different considerations I was bringing up earlier tie the whole thing together.

7:08Now, fourth, very common tax strategy that we are talking a lot about at the end of the year is to leverage charitable giving for tax savings. In general, it's not just a great way to support causes you care about, but when done correctly, it's a very smart tax strategy. So for starters, donating appreciated investments instead of cash will eliminate capital gains taxes on those assets. And for those who are over the age of 70 and a half, qualified charitable distributions or QCDs allow you to donate directly from an IRA, satisfying your required minimum distribution. The fifth year in conversation tax strategy point is just planning for legacy and inheritance.

7:49If leaving assets to your heirs is a priority, tax planning should play a central role, in part because the step-up and basis rule will reset the capital gains clock on inherited assets, meaning heirs only owe taxes on gains that occur after they inherit the asset, which makes deferring taxes more manageable for future generations. On the other hand, if you expect to use most of your portfolio during your lifetime, it's better to address taxes systematically while ensuring liquidity for your own needs. It's important to understand the rules around inheritance, and that can help you strike the right balance between enjoying your wealth versus preserving it for your loved ones.

8:29The last item that typically comes up in our year-end tax planning is just be ready to adapt to changes in tax law. Tax laws are constantly evolving, and staying informed can help you take advantage of opportunities or avoid potential pitfalls. For example, if capital gains tax rates are set to increase, realizing gains now could save you thousands in future taxes. Whereas conversely, if rates are expected to drop, deferring gains might be the better move. And this is where working with a professional who tracks these changes can be really helpful in getting you to pivot your strategy and to stay ahead of the game.

9:06And to me, the key to successful tax planning is recognizing that timing and strategy are interconnected. By understanding how these different strategies apply to your specific situation, you can avoid unnecessary surprises, but also keep more of your hard-earned money working for you. At the end of the day, tax planning isn't just about saving money. Truly, I believe it is about enabling the life you want to live. And that can mean a lot of different things for a lot of different people. The goal isn't just about minimizing taxes, but to manage them in a way that supports your financial goals.

9:44So as you plan for the year ahead, think about what matters most to you and how your portfolio can help you achieve it. One of the things that always strikes me about these types of episodes is that we're really in the shallows of basic financial advice. I mean, you're truly at the tip of the iceberg of what's possible. And for people who are out there managing their own finances, it's easy to get trapped by a plan that seems good enough. But at PlanCorp, we've perfected a process over the last four decades to bring clients' wealth into alignment with their goals and values. Would you be interested in seeing it?

10:21If so, I'd encourage you to go to callwithpeter.com so you can learn more, not just about how tax planning and thoughtful portfolio management can support your financial goals, but how the PlanCorp crafted advantage can help you achieve absolute wealth alignment. Again, that URL is callwithpeter.com. Thanks for listening, and I'll see you here next week on The Long-Term Investor. Thanks for listening to The Long-Term Investor podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan.

11:04All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.