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Taking Action With Tax Planning: Part 2

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Last time in our two-part series Taking Action With Tax Planning we looked at setting up a tax-efficient portfolio and actions to reduce your tax bill while working. In part two, let’s explore actionable steps to reduce taxes during the retirement transition and in retirement.

Phase 2 – Year of Retirement

So the time has finally come for you to hang ‘em up. Because you’ve been such a loyal employee, you’re going to get all your stock options accelerated, bonuses paid out, sabbaticals paid in cash, and they’re even going to pay you two years of salary to send you off a happy camper. In addition to a large pile of cash, this leaves you with an oversized tax liability. What can be done?

Front-load Charitable Giving via Donor Advised Fund (DAF)

For those charitably inclined, utilizing a DAF is a great way to reduce your tax bill in large income years. In short, a DAF is an account that allows for charitable donations of securities and cash. The donor receives in immediate tax deduction in the year of contribution, and the donated assets continue to grow tax free in the account until the donor gifts them to the qualified charities of their choice. The added bonus is you can donate highly appreciated securities (i.e. Intel stock) avoiding capital gains that would be otherwise owed.

For example, if you typically give around $10,000 a year and plan on giving that much through retirement, you could front-load the next 10 years by donating $100,000 to the DAF and receive the deduction in a year you’re in the highest tax bracket. DAF.pngSource: http://www.kiplinger.com/article/investing/T041-C032-S014-the-ins-and-outs-of-donor-advised-funds.html


Plan Your Itemized Deductions

In addition to concentrating your charitable giving in a given year, you have considerable discretion when it comes to other deductions. Accelerating the below deductions can allow for tax reductions if done properly:

  • Property taxes
  • Mortgage payments
  • Estimated State Income taxes

For example, if 2016 is an abnormally large tax year for you, consider pre-paying your 2017 property taxes and making your January mortgage payment in December. And if you expect to have a state tax liability payment in April, you may want to make that payment in December as well.

It should be noted for taxpayers that are potential AMT candidates, some of these deductions could be disallowed and consulting with a CPA is strongly encouraged.

Phase 3 – Retirement

Now you’ve made it through your last big tax year, restructured your portfolio for tax-efficiency and are drawing from your assets to support your lifestyle in an optimized fashion, does the fun stop there? Of course not!

As demonstrated on the overly simplified chart below, for those entering the retirement “sweet spot”, when the paychecks are gone and Uncle Sam isn’t forcing you take Required Minimum Distributions (RMDs) at age 70.5, there are opportunities to take action by “forcing” distributions out of your tax-deferred accounts at lower tax-brackets than you’ll otherwise be in once RMDs begin.

Overly Simplified.png

Source: Cordant's hypothetical example

For many, they might see the string of $0s in the tax row and be content with not dishing out anything in taxes for a few years. However, by not taking action and “forcing” income out, they will lose a great opportunity to reduce their lifetime tax liability. How? Because IRA distributions are taxed at ordinary income rates, if you have significant tax-deferred assets, you will be bumped back into higher tax brackets once RMDs begin. Bottom line, if you can stomach the initial pain of “forcing” yourself to pay taxes, you will benefit in the long run with a reduced aggregate lifetime tax payment.

Roth Conversion in Retirement

Okay, so you’re on board with strategically reducing your tax-deferred assets prior to age 70.5. But what if you don’t need the withdrawn funds to live off of? Consider a Roth Conversion. By moving assets to the tax-free Roth buckets at lower marginal rates than they would be otherwise taxed at later, you can effectively lower your lifetime tax bill. There are no limits on how much you can convert, although it generally makes more financial sense to execute partial conversions. The below chart illustrates this point by highlighting when it makes sense to convert assets and when it doesn’t: IRA Distributions.png

Source: https://www.financial-planning.com/news/kitces-tax-efficient-retirement-draw-down-strategies

Let’s review an example together. Assume an individual has very large tax-deferred assets and will most likely be in or above the 25% bracket through retirement. Because of this, they want to optimize for the 15% bracket. During year-end planning they make projections for their base income (Social Security, wages, pension, etc.) and deductions, and decide to convert $50,000 from their Rollover IRA to their Roth IRA to force additional income for the calendar year. Because of some unexpected year-end distributions, when the individual filed their tax return the following spring they they ended up in the 25% tax bracket. Because the IRS allows investors to reverse (all or partial), or “recharacterize”, Roth Conversions until October 15th of the following year, the individual recharacterized $13,285 of the conversion to max out and optimize the 15% tax bracket.

ROTH RC.pngSource: https://www.kitces.com/wp-content/uploads/2015/11/Graphics_31.png

By effectively taking action and intentionally targeting the 15% tax bracket, they have reduced their tax-deferred bucket and, more importantly, reduced their lifetime tax bill. 


At Cordant, we’re proponents of focusing your time and energy on things you can control. While tax planning will never win any People’s award for sexiest topic alive, it shouldn’t be overlooked as an opportunity to take action that will actually improve your financial well-being.

If you'd like some help managing your investments in a tax-efficient manner, creating a financial plan or designing a well-diversified portfolio, get in touch. We actually do this stuff for a living.

Click here to contact Cordant and start making smart and intentional financial decisions


Click here for disclosures regarding information contained in blog postings.
Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on December 15, 2016

Scott Gerlach, CFP

Scott Gerlach, CFP

Scott Gerlach is an Advisor for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Scott's full bio or find him on LinkedIn.

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