One of the senior tax strategies few seniors are actually aware of is called asset positioning. This is where you figure our where to place your investments so you pay as little tax as possible.
One of the important senior tax strategies for retirees is something called asset positioning. This basically means you need to figure out what investments to place in which accounts so that you’re paying the lowest tax possible.
For example, you probably already know that your IRA is not subject to any taxes until you receive a distribution. But did you know that money that you have in a brokerage account is taxed each year? That means any of the capital gains, dividends or interest you receive is taxed, even if you didn’t spend any of it.
As a retiree, your senior tax strategies probably include a mix of stocks, bonds, CDs or other interest bearing accounts. The question becomes, what do you do with these? Put the taxable portion in the brokerage account, the IRA or in both?
The answer is, both. You will probably lower your tax bill if you put your bonds in your IRA and stocks in your brokerage account.
Doing the Math
Long term capital gains and stock dividends are taxed at about 15%. However, IRA distributions are taxed at the traditional tax rates. That means 10% up to $16,870, 25% at $68,000, 28% beginning at $137,300 and 35% for income over $373,650.
Let’s say you have $25,000 in Social Security income and with your investment distributions, you pull in $100,000. Since $16,750 of it is taxed at 10% you can still squeeze in about $43,000 before you hit the next bracket (25%). This comes from your IRA. To hit $100,00, you still have $32,000 to allocate. If you take it out of your IRA, you go up to the 25% tax bracket. But if you take it from your brokerage account you only pay 15% on the money.
As you can see, you can lower your tax bill by changing the way you allocate your funds, balancing your IRA and brokerage account funds to stay under the higher tax bracket.
The Fine Print
This isn’t always as easy as it seems. To make this work, you need to get as many equity holdings into accounts where you can benefit from the 15% dividends and capital gains tax rates. For example, bond interest can go into the IRA because it’s subject to ordinary income tax rates.
As you know, the tax rules continue to change as the government seeks to plug holes in the tax system and raise additional revenue without raising taxes. As such, you’ll always want to work with a tax attorney and a good accountant to maximize your income while minimizing your tax liability.
Regardless of how things shake out in Congress, asset positioning can potentially save you money and is one of the best senior tax strategies acound. The challenge is to determine which assets go in which bucket to gain you the biggest tax advantages when the IRS comes calling April 15.
