Our Tips for Tax-Efficient Retirement Planning

By Nicola Cyr, CFP®, EA

The IRS doesn’t forget about you when you retire. Fortunately, tax-efficient retirement planning can help you preserve more of your nest egg.

Consulting a knowledgeable advisor at CGN Advisors, a fee-only financial advisory firm, can help you carry out prudent retirement and tax planning for the life you want after your working years. Here are some tips for maximizing tax efficiency in retirement.

Convert to a Roth IRA

A Roth IRA can give you tax-free distributions in retirement, making it a valuable way to preserve your hard-earned dollars. In 2024, the Roth IRA contribution limit is $7,000 for those under 50 and $8,000 for those 50 and older. However, not everyone can contribute directly if you either don’t have any earned income or have too much income.

Even if you can’t contribute directly, it might make sense to instead convert dollars in a traditional IRA to your Roth IRA. Your money can then grow and be withdrawn tax-free in retirement. Timing is key to this tax-efficient retirement planning strategy and often works best for younger retirees with little to no other income before things like pensions and Social Security benefits kick in later in retirement.

A decision to include Roth conversions as a retirement strategy should always be made in reference to your overall financial plan, and it is important to consult your tax professional prior to executing any Roth conversions.

Qualify for a 0% Tax Rate on Long-Term Capital Gains

When you sell an asset, such as stock, the difference between what you paid and what the asset sold for is taxable to you as income. The long-term capital gains tax applies to assets held longer than a year. You may be able to pay a 0% tax rate if you’re single and earn less than $47,025 or married and filing jointly and earning less than $94,050. Once you exceed those thresholds, long-term capital gains are taxed at 15% until your taxable income gets above $518,900 for singles or $583,750 for couples, at which point the tax rate goes up to 20%.

Maximizing deductions can help maintain your taxable income within the 0% capital gains tax bracket. However, it's important to be strategic when realizing any amount of gains, as these can increase your adjusted gross income (AGI) and impact the taxability of your Social Security benefits or might also result in state tax liabilities.  At CGN Advisors, our investment management services are performed with an intentional approach to realizing capital gains and losses in light of a person’s specific tax situation.  With a comprehensive relationship, we are able to assist clients in taking advantage of opportunities such as the 0% Capital Gains bucket.

Understand Inherited IRAs

An inherited IRA is an account opened by the beneficiary of someone who passed away and owned an IRA. The beneficiary could be a spouse, child, relative, friend, trust, estate, or even a charity. There are important tax implications to consider for these sorts of arrangements.

If you’re the spouse of the deceased, you can roll the IRA into your own IRA, thereby avoiding current taxation and potentially delaying required minimum distributions (RMDs). Taking a lump sum could cause you to end up with a large tax bill. Other options include:

• Withdrawing the money over 10 years to deplete the account
• Using the life-expectancy withdrawal method to determine your RMD
• Refusing the inherited IRA

If you’re a non-spouse, you cannot roll the inherited IRA into your own IRA, and you typically have to empty the account within 10 years (unless an exception applies). Understanding the distribution options available to you as a beneficiary is the first step in determining the most tax-efficient strategy for your specific situation.

Donate to Charities or Causes

You can potentially save on your taxes by donating to your favorite charities with a tax deduction of up to 60% of your AGI. The benefits are even greater if you donate appreciated assets. By giving appreciated assets, such as stocks you've held for over a year, to a charity, you avoid paying capital gains taxes on the appreciation and can still deduct the full value of the donation. This effectively eliminates the capital gains tax on those assets. Conversely, if your assets have depreciated, it’s more advantageous to sell them first and donate the proceeds, allowing you to claim a loss on your taxes.

Through a donor-advised fund or charitable trust, you can make a large donation now, take the deduction, and make smaller donations to charities of your choice in your own time.

Avoid the Medicare 3.8% Surtax

You might be hit with the 3.8% surtax on Medicare if you’re a high-income earner and have taxable investment accounts. Also known as the net investment income tax, it’s paid by individuals with incomes above certain modified adjusted income thresholds, as follows:

Single or Head of Household: $200,000

Qualifying Widow or Widower With a Child: $250,000

Married Filing Jointly: $250,000

Married Filing Separately: $125,000

This tax typically applies to passive sources of income such as interest, dividends, and capital gains if your total income falls above the threshold applicable to your filing status. You can avoid the 3.8% Medicare surtax by keeping your MAGI below the threshold applicable to you.

Please note that this 3.8% tax on passive income is different from the Additional Medicare Tax of 0.9% assessed on wages, compensation, or self-employment income over similar thresholds.

Seek Tax-Efficient Retirement Planning Help

Are you ready to take control of your financial future? At CGN Advisors, we specialize in comprehensive financial planning and investment management plus in-depth guidance on tax-efficient retirement planning tailored to help you strike a balance in your life between enjoying today and planning for tomorrow. 

To schedule a meeting, call (785) 340-3434. We look forward to speaking with you!

About Nicola

Nicola Cyr is the Director of Operations & Compliance at CGN Advisors, a Fee-Only, financial advisory firm based in Manhattan, Kansas. CGN’s team of financial advisors is made up of native Midwesterners who are passionate about helping clients plan for the future. An advisor since 2017, Nicola utilizes her in-house tax preparation and planning proficiency to strengthen client relationships with their advisors and the firm as a whole. She appreciates the value and team approach CGN provides, allowing them to offer services in a range of complex planning areas without the need to outsource. Combining her affinity for educating people, financial puzzles, and a personal motivation for excellence, Nicola enjoys the challenge of balancing the quantitative “right answer” with the qualitative aspect of behavioral finance for each unique client situation. 

Nicola holds a Bachelor of Science in Personal Financial Planning and a minor in English from Kansas State University, the CERTIFIED FINANCIAL PLANNER™ certification, as well as the Enrolled Agent (EA) designation, which permits her to practice before the IRS. Prior to joining the CGN team, Nicola gained experience as a licensed State Farm Insurance saleswoman and as a research assistant for Stu Heckman, PhD, CFP®, assisting with research papers and development of undergraduate class content.

Nicola and her husband, Ryan, have two sons, Ezra and Elias, daughter, Evangeline, and a faithful hound, Phoebe. Most of Nicola’s free time is spent with family, participating in her children’s extracurricular activities, and nurturing her passion for houseplants (owning and caring for 50+ between the office and home). To learn more about Nicola, connect with her on LinkedIn.