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As Thomas Jefferson said, “Taxes should be proportioned to what may be annually spared by the individual.” –Thomas Jefferson to James Madison, 1784.

What does this mean? It means minimizing tax on your anticipated income, your investment returns, and the transfer of your hard-earned wealth to the next generation. Essentially, the goal is to pay as little in tax as possible over your lifetime and beyond.

For those planning for or in retirement, tax efficiency is even more important as you grapple with the prospect of living on a “fixed income” relying on income from Social Security, annuities, and investments rather than on earned income from your employment or business ownership which can be expected to increase over time.

It is important in your planning to consider both short-term and long-term strategies. As shown in the first example below, long-term strategies could be tremendous even though in the short-term you will pay tax upfront.

Here are three examples that can save you a bundle of tax when planned wisely:

1)     Converting a traditional IRA to a ROTH IRA.

One caveat is that this plan works only when your long-term tax benefit outweighs the initial tax cost.

Even with the new so-called SECURE Act which requires a ten-year payout with certain inherited IRAs, converting to a ROTH IRA may reduce your tax, if you are the original owner or the spouse of the owner and have a “spousal IRA”. The critical analysis includes, whether based on personal health and family longevity, you can expect to live at least ten years or more, after a ROTH IRA conversion. This will save income and capital gains taxes on the growth of the ROTH IRA over time. It is essential that you compare the tax paid on the ROTH conversion(s) to the expected future tax savings in your analysis.

2)     Income Tax Bracket management.

This strategy relates to the ROTH conversion strategy above and applies to any taxable/ brokerage account you may own. It is best to consider your marginal income tax rate (your highest tax bracket in a typical year) before incurring more income tax due to either ROTH conversions, IRA distributions, or the sale of investments in a taxable account regarding mutual funds or individual stocks and bonds.

The optimal plan is to make sure the IRA distributions or stock / bond sales do not put you in a higher income tax bracket. For example, if your marginal tax bracket is 24%, it is optimal to convert to a ROTH up to but not more than your top bracket so that your marginal tax does not jump to the 32% tax bracket.  In 2019, for married filing jointly filers the 24% tax bracket starts at $168,400 taxable income, and the 32% bracket starts at $321,450. To optimize tax bracket management on the conversion, it is best to take distributions that keep your taxable income in the 24% bracket. Other tax planning considerations include the Net Investment Income Tax (NIIT) and the Qualified Business Tax Deduction.

3)     Optimal investment strategies using taxable and tax deferred accounts.

Consider putting investments such as growth stocks that have high potential to increase their share price in taxable, brokerage, accounts and fixed income or high-dividend paying investments in (tax-deferred) IRA accounts.

For example, investments that have potential to incur a low tax, capital gains tax of 15%, consider holding them in taxable brokerage accounts, and investments such as bonds and real estate investment trusts (REITs) that pay high dividend rates per year and that are taxed at the highest tax rate, place these investments in IRA accounts or other tax deferred accounts.

We will share additional investment strategies that minimize tax in our next blog article on tax tips for taxable investment accounts.


Your questions and comments are welcome regarding these important planning issues.

We are pleased to offer a complimentary meeting to discuss your questions on these important tax and wealth management issues.

This article is for informational purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors before attempting to employ any concepts stated herein.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general educational information only.