• Geoff Wells

The Importance of Multi-Year Tax Planning


As we approach the end of the year, we want to share financial and tax planning techniques that can be utilized. As with any tax advice, please consult your tax professional. Background Over the long-run, investors with both taxable and tax-advantaged accounts (IRA, 401(k), 403(b), Roth IRA, etc.) can benefit from tax planning that takes into account not just the current year income, but expectations of future income.  One time period when this is especially true is after-retirement and before reaching age 70 ½, which is when required minimum distributions (RMDs) begin.  During this time period, investors have the most flexibility with regard to which accounts they take distributions. Techniques Before Retirement While working, an individual’s income tax rates are usually the same or higher than the rates expected during retirement. Generally, this means you should defer taxes until your expected tax rate drops.  Below are a few planning techniques that can help defer taxes to a later time period.

  • Maximize retirement plan contributions – Retirement plans may differ with regard to specific rules and regulations, but the main goal of each of them is to help individuals save for retirement in a tax-efficient manner.  Whether it is a 401k/403b/457/Simple IRA/SEP-IRA/i401k or another variety of qualified plan, it generally makes sense to contribute on a pre-tax basis while in a high-income tax year.  

  • Fund 529 college savings plans for children/grandchildren – 529 college savings plans are a great way to save for higher education costs and offer great tax benefits.  Although yearly contributions to 529 plan do not qualify for Federal tax deductions, New York has a state tax deduction of $5,000/year/contributor when the NY state sponsored plan is used. This can save most married couples between $600 and $700 per year on their New York State taxes. Additionally, when money is distributed from these accounts, gains are not taxable, as long as the funds are used for qualified expenses.  Due to its tax benefits and low internal expenses, we recommend New York residents use the Direct plan available at www.nysaves.org.  

  • Consider a non-qualified retirement plan – While most employees may not have the ability to save in a non-qualified retirement plan, many high-level managers and firm owners may also be able to defer additional income for retirement.  Be aware, these plans are typically quite complicated and should be analyzed on an individual basis.

  • Charitable giving – For individuals high tax brackets or with large unrealized gains in taxable accounts, charitable donations may be considered. Even when the individual does not have a charity in mind, there are options available.  One of the easiest methods is a Donor Advised Fund (DAF). A DAF contribution creates a tax deduction in the current tax year and allows the money to be held/divided to charities in future years.  There are annual limits for charitable deductions, so exact calculations will vary depending on the individual. Please keep in mind, one way to help maximize the tax benefits of gifting strategies is to “bunch” yearly planned gifts in the same calendar year. Below is a hypothetical Charitable Giving Example:

  • Gifting $50,000 of appreciated securities while in the 28% tax bracket – what would the actual “cost” of the gift be?

  • Stock – Basis - $20,000.Value - $50,000.Unrealized Gain - $30,000.

  • Capital gains tax avoided – ($50,000-$20,000) * (15% federal and 7% state) = $6,600.

  • Savings from income tax deduction - $50,000 * (28% federal and 7% state) = $17,500.

  • Actual “cost” of a $50,000 gift in 2019 - $50,000-$6,600-$17,500 = $25,900.


Techniques After Retirement:

In retirement or during lower income-earning years, we recommend projecting tax returns before the calendar year-end. In doing so, you should compare the current expected tax rate to future expected rates. Keep in mind future RMD requirements and Social Security income.  If in a given year, the current marginal tax rate is lower than the estimated future tax rate, you may consider:

  • Traditional IRA to Roth IRA Conversions – This process is converting Traditional IRA assets into a Roth IRA without actually receiving the proceeds of the money.  When doing so, taxes on conversions are realized in the current year and paid from a taxable account.   For example, if the current tax bracket 12% while a future bracket 22% it may make sense to convert a portion of a traditional IRA to a Roth IRA.  Keep in mind Traditional IRAs are subject to RMDs while Roth IRAs grow tax-free and are not be subject to RMDs (except for beneficiaries).  

  • Realizing Capital Gains at 0% or 15% instead of a higher level – Once out of the top few tax brackets, the rate of taxation on capital gains drops from 23.8% to 15% or even 0% depending on your income.  Early retirement could be the perfect time to realize some long-held capital gains in a brokerage account without a large tax bill. 

  • Social Security Timing Upon reaching age 62, most retirees are able to start receiving Social Security benefits, however, there is no requirement to begin until age 70.  By delaying benefits until age 70, expected benefits increase approximately 6-8% annually.  In addition, by delaying Social Security benefits, the planning techniques written above can be more meaningful.  The optimal strategy for claiming Social Security benefits is based on life expectancy and since this variable is unknown, the break-even age (when you would receive more benefits from the government by delaying) should be analyzed and factored in with all other financial resources.   

  • Maximizing state tax deductions – Many states offer retirees tax incentives to stay in the state.  For New York, each retiree is able to exclude $20,000/year from IRA or pension income annually. 

Summary As you can see by the few examples listed above, multi-year tax planning can be a critical tool in maximizing after-tax investment returns and meeting your personal financial goals and wishes.  Please let us know if you have any questions relating to your personal situation. We are happy to help.