Minimize Taxes in Retirement

One of the great certainties in life—paying taxes—will still be here during your retirement years. But with the right strategies, it's possible to defer, reduce and even avoid certain retirement taxes and penalties.

Note: This article refers to current tax laws and is subject to change.

Consider Tax Rates Now and Then
Perhaps the trickiest aspect of retirement planning is trying to predict what the tax rates are going to be when you retire. The earlier you start planning, the more difficult this guessing game gets.

If you've accumulated a significant amount of wealth during your working years, capital gains and estate taxes will be a major concern for you.

A tax-deferred account (traditional IRAs, 401(k)s, 403(b)s and certain annuities) that offers you tax benefits now will lead to taxable withdrawals during retirement. A non-deductable account (Roth IRAs) that requires you to contribute taxable income now will spare you paying taxes when you retire.

Ideally, you'll want your money diversified between the two options during your working years. This gives you the flexibility to benefit from either scenario. As you get closer to retirement, you and your BB&T financial advisor will need to act based on the most likely circumstances ahead; moving money from your tax-deferred accounts to your non-deductible accounts. You may take an initial tax hit for doing so, but if tax rates remain high, you'll save money over the long term.

When it comes to timing, also consider the Required Minimum Distributions (RMDs) you will need to take from your tax-deferred retirement accounts. By the time you reach age 70½, you must start withdrawing the legally required minimum amount. Neglecting to do this will incur severe tax penalties.

The Impact of Income Taxes on Your Retirement Income
While there's a penalty for withdrawing less than the required minimum from some of your accounts, there is also an indirect penalty for withdrawing too much. If you take out a large amount of tax-deferred money during a given year, you may inadvertently push yourself into a higher income bracket for that period.

Strategize Ways to Reduce Capital Gains and Estate Taxes
There are a number of tactics for handling this challenge.

  • Charitable Remainder Trusts: These allow you to apply additional charitable deductions to your annual income tax, while providing you with supplemental income throughout the remainder of your lifetime. They can also help you avoid capital gains taxes on the donated assets and allow you to reduce your overall estate tax. Learn more about Charitable Remainder Trusts.
  • GRATs and Family Trusts: Grantor Retained Annuity Trusts (GRATs) and family trusts allow you to transfer assets out of your estate for a limited term or a lifetime, thus deferring or eliminating estate taxes on those particular assets. Learn more about Grantor Retained Annuity Trusts.
  • Dynasty-Delaware Trusts: This is a trust that doesn't just benefit your children or grandchildren, but multiple generations of descendents. Best of all, this type of wealth transfer will allow you and your beneficiaries to reduce estate taxes. If you're future-minded regarding your legacy, the Dynasty-Delaware trust may be a good option for you.
  • Reverse Gifts: This option is particularly useful in counteracting capital gains taxes. Consider this scenario: If you pay $4 for a stock and sell it when it's worth $90, you'll make a substantial profit on which you'll pay capital gains taxes. However, if you give the stock to an aging or terminally ill family member who bequeaths the stock back to you upon his or her death, you receive it at a higher value and will avoid paying capital gains taxes based on the original $4 purchase value.
  • Harvesting: This practice is a good strategy for offsetting capital gains. Identify a stock in your portfolio with losses equivalent to your capital gains, and then sell the losses to counterbalance your overall gains. After 30 days, you have the option of buying back any stocks you sold.

Ready to take action?
Planning your retirement in a way that navigates around numerous tax implications requires the assistance of a knowledgeable professional. To maximize your retirement income, contact your BB&T financial advisor.

Email an advisor or call us at 800-228-9798.

Speak with an Advisor

Call 800-228-9798