• Mike Komara

7 Tax-Smart Strategies for Retirement

Saving for retirement is an important goal. Smart tax planning can help you grow your savings faster and keep more of your savings for retirement. Here are seven tax strategies to consider that might save taxes for you or your family.

1. Max Out Your IRA

One smart tax strategy is to make the maximum contribution to your IRA. The IRS sets the maximum each year; in 2022, the maximum is $6,000 for people under 50 and $7,000 for those older than 50. You must have earnings from a job to make contributions, and your contributions can't exceed the amount you earn.

If you're self-employed or own a small business, you can establish and contribute to a Simplified Employee Pension IRA (SEP-IRA), which allows for more significant contributions than a 401(k). A small business owner can contribute up to $61,000 to a SEP in 2022. If your business employs others, the SEP-IRA will have to cover them, as well.

2. Tax-deferred Accounts

Contributions made to tax-deferred accounts and their gains are not taxed until you withdraw the money at retirement. Since income is likely to be lower in retirement than in working years, many people will save taxes using tax-deferred accounts. Traditional IRAs are one example, but 401(k)s and 403 (b)s are other examples of tax-deferred accounts.

3. Consider a Roth IRA Conversion

Roth IRAs differ from traditional IRAs because your contributions are taxed upfront; only your gains are taxed when you withdraw the money. Only people who make less than a certain threshold can contribute to Roth IRAs. The IRS establishes the threshold annually; in 2022, it is $129,000 for single taxpayers and $204,000 for married taxpayers.

Even if your income exceeds the threshold to contribute directly to a Roth IRA, you may be able to convert a traditional IRA into a Roth. Converting is a good tax strategy if you don't expect to need the money during your lifetime and want to leave it to your children. Otherwise, leaving a traditional IRA to your children would subject them to taxes when they take distributions.

4. Municipal Bonds and Funds

Income distributions from municipal funds are exempt from federal taxes. Because Florida has no income tax, they are also exempt from taxation in Florida, although residents of other states may pay state income taxes on the income the bonds generate. Because municipal bonds are federally tax-exempt, their interest rate typically is lower than many other investments. Munis are a good investment for many people, but not everyone. Solas Wealth can help you determine if they fit into your overall investment strategy.

5. Give Your Distribution to Charity

Another way to lower taxes is to give distributions to charities. In many cases, the rules allow individuals 70 1/2 or older to make a Qualified Charitable Distribution (QCD) of up to $100,000 directly from their IRAs. Contributing directly from the IRA will save taxes.

To qualify as a QCD, you must donate directly from the IRA to an eligible charity. Work with your Solas Wealth adviser to be sure the charity qualifies. Also, be sure to list the QCD properly on your tax return.

6. Consider a Smart Gift With Your Distribution

To avoid stiff penalties, you generally must take a required minimum distribution (RMD) from your traditional IRA each year after your turn 72, or, in some cases, 70 1/2. The exact RMD required varies yearly and depends on life expectancy tables. You can use that distribution (or any distribution) to help fund a 529 college education plan for a family member. You'll still have to pay taxes on the distribution, but generally, the 529 funds will grow tax-free.

7. Consult with a Wealth Adviser

The best tax strategy varies based on the individual's situation and goals. Solas Wealth can help you develop an individualized tax strategy to help you save for retirement and to protect your savings from undue taxation. Connect with us online, and we'll schedule a time to talk with you about your retirement tax strategy.