Retirement Answers

Jacob: 00:02

We're almost to the end of the year, and today we'll walk through these different tax planning tips that you can think about for year end, hopefully be reminders for you, so you don't miss anything that could help you improve your financial situation heading into 2024. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.

Jacob: 00:42

Hey, friends, and welcome back to another episode of Retirement Answers. We are coming off of Thanksgiving week. So I hope you had a wonderful Thanksgiving with friends, family, or those that you love and hope you had some great food. And now we're all recovering and hopefully had a good nap after Thanksgiving lunch or dinner. So, with that, as I was enjoying time with friends and family, I realized that we're almost to the end of the year and I wanted to, put an episode out around tax planning tips that I think you could benefit from or just be reminded of as we get closer to the end of 2023, which has just kind of crept up on us really quickly, in my opinion, and it's just kind of all come really fast.

Jacob: 01:21

So hopefully today we'll walk through these different tax planning tips that you can think about for year end, hopefully be reminders for you. So you don't miss anything that could help you improve your financial situation heading into 2024. So that's what we're gonna talk about today. And, before I get started with that, I wanted to make sure that I'll let you know about two things. The first one is I wanted to highlight this week's listen review, and it comes from Carlton Fisk is awesome.

Jacob: 01:44

And he says, he gives the show five stars. He said, this is fantastic, easy to listen, and it's relevant. Keep up the good content, new subscriber here. Carlton, thank you so much for that review and thank you for listening. I'm glad that you found the show helpful.

Jacob: 01:57

If you're someone who has found this show helpful in terms of planning for retirement or just all the different things that you have to consider, I would love it and really appreciate it if you gave a rating and review there on Apple Podcasts or on Spotify. That helps me out a lot know that I'm doing a good job for you giving you relevant content, but then also, it helps other people find the show. And the second thing is, as I go through these different tax planning tips for year end, just know that I have a checklist that I go through with each of my clients every year. And if you'd like a copy of that, so you can run through that yourself, then email me just saying that you want to see the copy of that checklist and I'll happily send that over to you. So just know that once you're done listening to today's episode, go ahead shoot me that email.

Jacob: 02:36

I'll happily send that over to you so you can use that to your advantage as well. So with all of that out of the way, let's go ahead and jump into the list I have for you here today. The first item I have on the list is have you maxed out your four zero one k's or your IRA's for the year? Especially if you're wanting to do so, you know, if you're trying to make sure you're getting the most out of each of those accounts by contributing as much as you possibly can, whether it be to an employer four zero one ks or an employer four zero three b or TSP for that matter. This year, you can contribute a decent chunk of money to those.

Jacob: 03:05

So if you were planning on maxing those out, then make sure that you're going to do that. Also for the IRA side, whether that's a traditional IRA or a Roth IRA here in 2023, you can contribute $6,500 if you're under age 50. If you're 50 or older, you can contribute $7,500 using that $1,000 catch up contribution. But if you're wanting to max out your four zero one ks or IRAs, go ahead and do that. That way you don't miss out on any potential investment opportunities there.

Jacob: 03:31

Now, another thing from a tax standpoint that I wanted to mention here is if you're trying to focus on lowering your overall tax bill this year, well, maximizing how much you're contributing and maxing out how much you actually add to the four zero one ks and the traditional IRA will help lower your income this year. So if taxes are going be higher this year, maybe your income is higher for some reason, then maybe consider a maxing out that tax deferred retirement account to help offset some of those additional income dollars that you've got coming in. And for your Roth accounts, just know that, you know, you don't actually get a tax deduction to add money to those accounts, but the huge tax benefit you're gonna get over time, especially if you're still fairly young, let's say under age 60, then you have the opportunity to use that account type to its advantage, right? The benefit of a Roth IRA is the tax free growth that you're gonna get to take out in the future. So it's not a tax benefit right now today here before year end, but what it is is the tax benefit five, ten, fifteen, twenty years down the road, whenever you get to access that money tax and penalty free.

Jacob: 04:31

So that's the first one, make sure you're maxing out your four zero one ks's or your IRA's if you're wanting to do so either from a tax deduction standpoint, or on the Roth side, utilizing the tax free growth potential in the account type for future tax benefits down the road. Alright, the second tip I have for you today is check your brokerage accounts for any losses. And what you can do here is you can do what's called tax loss harvesting. So coming out of 2022, there was plenty of reason maybe to do a tax loss harvest last year, but you can also potentially do that this year in 2023. Even though the market has gone up, there still might be some outstanding losses from last year that we can use to offset against any other income or capital gains that we've realized this year in your brokerage account.

Jacob: 05:13

So there's two things to really consider here. The first one is that you can offset any capital gains with capital losses in your account. So for an example, let's say you've realized $10,000 of capital gains in your brokerage account here in 2023. Well, you can offset that $10,000 of capital gains and not pay any capital gains tax on that If you also have $10,000 of capital losses that you can realize and sell, and then you offset those two to equal zero. So that's one way to do it.

Jacob: 05:40

Or you could say, hey, I've got $10,000 of gains, but hey, I only have $3,000 of losses. Well, I can still realize the losses, but now I only have to pay taxes, capital gains taxes on that $7,000 of gains because the 10,000 minus the three equals seven. Now that's one way to use tax loss harvesting to your advantages is offsetting capital gains within the account type. Well, another way that you could do this is you could actually realize capital losses. And if you don't have any capital gains that you've realized, you can offset $3,000 per year against normal income that you have from your w two job, or maybe your ten ninety nine or a business owner.

Jacob: 06:16

So you can offset capital gains against a normal income. But remember, the maximum per year is only $3,000 So for example, let's say you earned a $100,000 this year, and you realized $3,000 of capital losses within your brokerage account. Well, now, if you don't have any capital gains that offset that $3,000 of losses, you can apply that $3,000 of losses to your income of a $100,000 bringing your your net income down to $97,000 and then you can just run through the tax tables from there. So that's one way that you can use the brokerage account to offset any other normal income. And an important point here is that whenever you do this, let's say you realize more than $3,000 of losses in your portfolio.

Jacob: 06:57

Let's say you realize $20,000 of losses and you still have a $100,000 of income. Well, remember, you can only use $3,000 per year, but the key here is that all the leftover losses, they carry forward every single year. So this year at $20,000 of losses, you subtract three out of that to offset against your $100,000 of income. Now your income is only $97,000, but you have $17,000 of capital losses still left over, and you get to carry those forward into future years. So in 2024, now you can use another 3,000 out of that 17 that's left over bringing your balance down to 14,000 and 2025, it would go down to 11,000 and so forth.

Jacob: 07:33

So just because you are only able to use $3,000 a year does not necessarily mean that you don't get to use any capital losses that you realized above that those extra capital losses will carry forward into future years, so you can make sure that you can use those later on. So that's tax loss harvesting. Well, another thing I wanted to mention here is going to be tax gain harvesting, right? I talked about this in a previous episode, so make sure to go back and check it out if you want to dig into this a little bit deeper. But if your income is low enough, you could be in the 0% long term capital gain bracket, right?

Jacob: 08:05

Especially for those of you who are early on a retirement, maybe you have not started social security yet, or maybe you've not taken much out of your tax deferred accounts like an IRA, or a four zero one ks. Well, you can use a low income year to realize capital gains at a 0% capital gain rate. Now, what are the brackets in terms of adjusted gross income that you have to be under? What's the amounts you'd have to be under to be in that 0% capital gain bracket? Well, if you are single, it is 44,625.

Jacob: 08:34

If you're married, it is $89,250 and this is for 2023. So every year that might adjust slightly. But if you are under that amount of income this year, in terms of your modified adjusted gross income, then the any gains that you realize, that do not add up to more than that will be taxed at a 0% capital gain rate. So if you're married and you're retired and not earning an income, and your only taxable income comes out to be $40,000 Well, you've got $49,000 of room to actually realize capital gains in your brokerage account and pay 0% taxes on that. And by doing this, you basically turned your brokerage account into a Roth IRA and you didn't even know it, Right?

Jacob: 09:13

So, refer back to the previous episode that I have done on that for a deeper dive just to really understand what is going on there. But you have two sides of this brokerage account that you can use to your advantage here at the end of the year, you could do tax loss harvesting and offset gains with your losses, or you can use losses to offset a portion of your taxable income for the year, or you can do tax gain harvesting if your income is low enough and pay a 0% long term capital gain rate on some of your gains. So that's number two, check your brokerage account for any losses and see if there's any way that you can use that to lower your tax bill this year in 2023. Number three is a reminder about RMDs or required minimum distributions. If you have a tax deferred account like a four zero one k or an IRA, whenever you reach age 72, if you've already turned 72 by the end of the year 2022, that means your RMDs have already started.

Jacob: 10:00

But if your RMDs have not yet started, that means they will either begin at 73 or they'll begin at 75. Now, the change in ages there is all due to the SECURE Act. But just know this, if you were 72 by the end of 2022, that means you need to continue doing RMDs like you already have, hopefully for last year. But if you turned 72 here in 2023, you get to wait a whole nother year to do your first RMD, meaning no one will do an RMD for the first time for the year 2023. So there's almost a one year gap.

Jacob: 10:32

So if you were 72 by the end of 2022, that means you are already doing your RMDs, nothing changes for you. But if you turn 72 this year here in 2023, you get to wait another year because the Secure Act change your RMD age or your required beginning date to age 73, which means you will not take your first RMD until twenty twenty four. So that's your reminder for doing RMDs this year is don't miss that because there is a penalty, they've lowered that penalty just a little bit, but there is a penalty for missing those or doing those late. So be sure to do your RMDs before year end. And one thing that I wanted to kind of give you a tip here or a pointer on is if you're charitable in any way, maybe you give it to a church or charity or organization that you believe in.

Jacob: 11:16

And I definitely want to encourage you to do that, because that's how we impact the communities around us. But if you are charitable, what you can do instead of an RMD, you could do what's called a QCD, a qualified charitable distribution. Now, I'm not gonna dive into what all this means or what all this is, but just know that in lieu of doing a required minimum distribution, you can do a qualified charitable distribution and send your RMD directly to the church or charity that you'd like to do so. So what that does is number one, it helps you not have to pay taxes on RMD that you otherwise would not need, but then also it helps the organization you're giving to receive money that way they can use it in the ways that they do. So if you're charitable in any way, just maybe look at QCDs if you're not needing all of your RMD.

Jacob: 12:01

And so you can do this partial. So let's say your RMD is gonna be $50,000 and you only need $25,000 to meet your income needs for the year. Well, you can take your $25,000 out, but the other 25,000 that's left over, that can be used as a QCD to give to the organization you'd like to give to, but then your full $50,000 RMD has been met by two things, you taking it yourself, but then also combining that with the QCD that you've done as well. So that's another tip here for you on RMDs in terms of how you maybe can lower your taxes by doing a QCD in replacement of that RMD. Now, one final thing that I wanted to make a note of here is that, maybe you have inherited an IRA or maybe a four zero one ks or something like that, a retirement account here in 2023.

Jacob: 12:45

Just know, two things. Number one is that your first RMD does not have to happen until twelvethirty one of the year following death. So that means twelvethirty one of twenty twenty four for anyone who passed away here in 2023. Your RMD as someone who inherited that account is not necessarily due until twelvethirty one of twenty twenty four. Now, there is a catch here.

Jacob: 13:09

Let's say that someone passed away and you received their IRA. Well, if they had not yet made their RMD and they were already making RMDs, so let's say they were 80 years old and you received their IRA, well, they'd already been making RMDs, but if they had not made their RMD for 2023 before they passed away here this year, that means that you have to make their RMD for them and then your RMD for receiving the account is not due until 2024. So a lot of RMDs and QCDs all wrapped up in this, but just know that if you inherit an IRA here in 2023, and the person that you received the account from did not yet make their RMD and they were already going, that means you have to do that for them here this year. That would be their quote final RMD even though they're not still living. And then your RMD for the inherited IRA that you received, that's not due until twelvethirty onetwenty twenty four.

Jacob: 14:01

So maybe I should do another podcast on that. Shoot me an email if you think I should just kind of clarify some of the kind of nuances of receiving inherited accounts, whether it IRAs, brokerage accounts, real estate, you know, annuities, things like that. If that would be helpful episode, shoot me an email, let me know that that would, I can put that together because I feel like there's a lot of questions there that can kind of be, nuanced or just kind of weird rules around inherited accounts. So that's the third tip for you here is don't forget about RMDs, but then also think about these different strategies that you can use to help lower your tax bill this year or in the future. Okay, the fourth item I have here is consider a Roth conversion.

Jacob: 14:38

Now, this is not for everyone, as I mentioned before, but it is a very powerful tool for lowering your tax bill in the future, right? The thing that we're trying to focus on here is lowering your taxes on income in the later stages or later years of your retirement, once RMDs kick in, or perhaps you pass away and leave a $2,000,000 IRA to a spouse who now has to file as a single filer and take the same amount of money out each year, which means the tax rate is gonna be nearly double what it was if you were a single person because the income is still the same, but we're now filing as a single file. That's what's called the widow's tax trap. That's what we're trying to solve with a Roth conversion is how can we, the rest of our lives, pay less tax. It's not necessarily paying the least amount of tax right now today, this year, it's more about how can we look forward and think about in a proactive manner, how can we pay less tax between right now and the end of life.

Jacob: 15:29

And many times with those of you who have a large tax deferred account balance, a four zero one ks and IRA, or maybe you've got a lump sum that's gonna be coming from an annuity that you're gonna roll over into an IRA one day, all of those account types are gonna be taxed one way or another, whenever you either take money before RMD age, or they're gonna be taxed as income whenever you start taking RMDs in the future, but how can we lower the tax bill on that for the rest of your life? So that might mean doing a Roth conversion here in 2023 to help you get more money to a Roth account that grows tax free, and ultimately will be lowering how much money you're gonna pay taxes on the future when RMD age rolls around. So what actually needs to happen for a Roth conversion to make sense? Well, number one is if you're in a lower income year than normal, right? So let's say that your normal income is around 150, but this year, for whatever reason, it's gonna be a 100 because you didn't get the bonus because of company performance didn't do as well, right?

Jacob: 16:22

Well, that might mean you can do a Roth conversion because it's lower than whatever your normal income will be, but also it's lower than what your income is expected to be here in the future. So is your income lower here in 2023? That means that you might have the opportunity to do the conversion that could benefit you long term. Also, if you're in retirement, you could be in what's called your gap years. And this is defined as basically the time that you retire until you begin Social Security or maybe a pension turns on.

Jacob: 16:48

So let's say you retire at 60, and you don't have a pension that turns on until 65, and maybe you're gonna start Social Security at 65 as well, where you have a five year gap that you're not receiving income that you were basically forced to receive, right? So that could be an opportunity in those lower income years early on a retirement to do a Roth conversion that will get more money out of a tax deferred status into that tax free status, and will result in lower tax bills later on in life for you, a spouse or any kids or grandkids who might inherit your accounts here in the future. So that's that's another way to think about it is are you in your gap years that might be a good time to do a conversion? Do you expect a higher income in the future? Do you have really large tax deferred accounts?

Jacob: 17:29

All these different things and kind of questions factor into is a Roth conversion right for you? And if yes, is the answer to a lot of these things, we'll evaluate that. Sit down with your planner and sit down with your CPA say, hey, is a Roth conversion something I should think about this year? And if so, I need to have that done by the end of twelvethirty one, by the end of the year. So, think about that.

Jacob: 17:49

That's tip number four consider is this something that would be good for me? The fifth tip I have for you today for year end tax planning is around charitable giving. So a couple things there is if you're itemizing and you're wanting to give to a church or charity out of cash that you have, well, if you're going to do that, it might be wise if you're kind of right on that edge of doing enough from all of your different tax deductions from an itemization standpoint, if you're right on the edge of doing more than the standard deduction, it might make sense to do a lot more this year before year end. That way you can realize some extra deductions by itemizing. Otherwise, typically that standard deduction is going to be fairly high for most Americans.

Jacob: 18:29

Therefore, itemization is not really a possibility like it was, you know, years back whenever we had really low standard deductions. But just something to think about, if you are close to being able to itemize, maybe do an extra mortgage payment to have a little more interest that you've paid on that balance sheet. But also maybe think about, hey, should I give more to a charity or church that I'm involved with? Also, terms of charitable giving, something maybe you wanna think about is gonna be what's called bunching. And this is whenever you, contribute or give more than you wanted to give this year, but it's for multiple years.

Jacob: 19:03

So let's say that you've got a really high income this year, maybe you had a sale of a business, or maybe you had a really big bonus, or for whatever reason, you just had a windfall that's going to be taxable income to you. Well, you could do what's called a donor advised fund. And this is whenever you can add all of your charitable contributions to a particular account in one year and lower your income by that amount, but you don't have to turn around and give all that money out of that charitable account right now today. You can actually do it over a number of years in the future. So here's an example.

Jacob: 19:33

Let's say that you normally earn $100,000 right? And this year, you're gonna earn $300,000 for various reasons. So that's way more than you ever do earn and expect to earn here in the future. It's just kind of a one off year that really good things happened. Okay.

Jacob: 19:47

So but you're also charitable, and you like to give to a charity there locally to you. But you typically only give, you know, $10,000 a year. Well, let's say that you have an extra $50,000 because you earned a lot more this year. Let's say that you you had an extra $50,000 laying around in cash, you're like, man, I really don't want to pay taxes on all 300,000 that I earned. How can I lower that?

Jacob: 20:08

Well, you can say I'm going to take $50,000 and I'm gonna contribute that to my donor advised fund this year, right now today. What that does is that now lowers your income down to $250,000 And then also, you have now essentially made your, your charitable contributions or charitable gift for five years because you typically do $10,000 per year. So now you can do this year's and then next year you can do another 10,000 out of the donor advised fund. And at the end of five years, all that $50,000 would be gone. But here's the thing, you get to actually itemize this year by doing a donor advised fund of $50,000 and next year, you wouldn't have gained anything from doing 10,000 a year from itemization anyway, because you wouldn't have itemized at all, you would just be doing a standard deduction.

Jacob: 20:54

So just know that you can do a donor advised fund. And this is obviously not everything that you need to know about them, but it is a thought evaluate is a donor advised fund right for me and actually bunching all of my gifts or contributions into one year to lower my income this particular year. And then I can take my, my charitable gifts out of that donor advised fund every year moving forward until it's depleted all the way to zero. But the key is you get the tax deduction right now in this year, especially for those of you who have that higher income for whatever reason. So that's number five, charitable giving, evaluate your different options there and think about how can I lower my taxes and also continue to give the way I enjoy giving?

Jacob: 21:33

Alright, the sixth tip I have for you today is maxing out your HSA. And this is obviously a health savings account, but here in 2023, if you're single, you can contribute $3,850 and that's deductible from your income. If you're a family, that means you can do $7,750 for your family to an HSA. So there's a few benefits to an HSA. The first one is that whenever you contribute money to that HSA, you get to take a tax deduction in the year in which you contribute it, tax deductible from your income.

Jacob: 22:05

The second thing is, is whenever you have money in that account, you can invest it and it can grow tax deferred for you into the future. And then the third one, makes it triple tax advantage is that you get to take money out for qualified medical expenses with no tax or penalty. So you get a tax deduction on the front end, no taxes along the way. And then whenever you take it out for a medical expense that's qualified here in the future, you can take that money out tax and penalty free. So it's like earning income using it for medical expenses and never paying tax on any of it.

Jacob: 22:35

Now, this is one of the most tax advantaged accounts out there. In fact, since it's tax friendly on three different ways, it's better than a Roth IRA, it's better than a traditional IRA, it's better than the four zero one ks because those are only beneficial on the front or the back end. It's not necessarily beneficial on both sides. So that HSA is huge. And if you're looking to lower your income just a little bit more, maybe think about maxing that out if you've not yet done so.

Jacob: 22:57

And I've actually got an episode already out on HSAs and how to really use those and kind of some next level ideas and thoughts and planning around that. So go back and listen to that one if you're interested in learning more about how HSAs work and how you can use those to your advantage. So those are some tax planning tips here for year end, just because year end is creeping up on us really fast. The holidays are here. But I hope you had a great Thanksgiving with your family and hopefully this was helpful for you.

Jacob: 23:22

If it was, I would love a rating review and appreciate you doing that. And also if you have questions for me, please do reach out. You've got my email, there's a contact down below in the description. Go ahead and check that out. Shoot me an email, schedule some time on my calendar for a quick call.

Jacob: 23:36

If you're someone who's trying to evaluate retirement and say, hey, I'm not sure what to do in this situation. Is there anything that I should be thinking about? Or how can you help me? Happy to have a conversation with you there as well. So with that being said, I really appreciate you being here and I look forward to talking with you again right here next week.

Jacob: 23:53

Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.

Jacob: 24:16

Thanks for tuning into this week's episode. I look forward to talking with you again next week.