December 21, 2016 in Taxes

6 year-end tax planning moves for retirees to finish the year off right

The end of the year is the perfect time to tidy up loose ends and make sure that you are doing everything you can to prepare your finances wisely.

Here are six year-end tax planning moves that you may not have considered and that can save you big money in retirement.

RATE SEARCH: Stretch your retirement income with a CD ladder. Compare CD rates today.



2016 is the last year that people age 65 and older and their spouses can deduct medical expenses that exceed 7.5 percent of their income. (For everyone else, expenses have to exceed 10 percent of income.)

Next year, that cap rises to 10 percent for everyone, points out Scott Sadar, an executive vice president at Somerset Wealth Strategies. If you qualify and you racked up some medical bills, December is your last chance to “take advantage of the lower hurdle,” Sadar says.

If you’re close to the threshold, you might consider getting that expensive dental work done or buying new eyeglasses or hearing aids. Of course, you have to itemize to take medical deductions.

The IRS spells out clearly the expenses that qualify and those that don’t. Bankrate’s article “tips on maximizing your medical deduction” also provides good advice.



Qualified longevity annuity contracts, known as QLACs, don’t just guarantee you lifetime income. Buying one in your IRA also gives you the option to delay receiving income payments from the annuity until age 85, at which point you’ll owe tax on the income. Meanwhile, you don’t have to take required minimum distributions, or RMDs, on the amount you paid for the QLAC. That results in some tax savings, for a while, at least.

The IRS calculates the amount of your 2017 RMD is based on what’s in your tax-deferred savings on Dec. 31 of this year. If you buy your QLAC before then, you can start taking advantage of your tax break in 2017, Sadar says.

RATE SEARCH: Need a place to park your money? Compare CD rates at Bankrate.com today!



“We’ve had seven years of a bull market. Now’s the time to look at your portfolio and rebalance,” advises John Sweeney, executive vice president, retirement and investing strategies for Fidelity Investments.

If good returns have pushed your equity allocation in your taxable accounts higher than the recommended level for your age, you may be putting yourself at risk, says Sweeney. He recommends looking hard at where your money is and selling some losers to offset gains or free up cash to purchase bonds. Reluctant investors might want to follow Bankrate’s portfolio rebalancing tips.

Sweeney also advises people whose money is in tax-deferred accounts to reconsider their investment mix. “You need to revisit your investments as the market moves and your situation changes. If you haven’t rebalanced your portfolio over the last few years, you may be surprised at how much additional risk you are now taking on,” Sweeney says.



Money in a Roth IRA is exempt from RMD rules. So converting part of a traditional IRA into a Roth can be a good maneuver for those who still have “room” in their tax bracket.

At this point, you know how much money you have earned this year. So, for some people with traditional IRAs, it makes good sense to convert just enough money to a Roth to stay in the lower bracket.

For example, if your income is not quite at the top of the 15 percent or 25 percent bracket (shown below), it makes good sense to convert just enough to stay in the lower bracket and pay tax at the lower rate.

Top end of tax bracket Single filers Married filing jointly
15% $37,650 $75,300
25% $91,150 $151,900

Leon LaBrecque, founder and CEO of LJPR Financial Advisors in Troy, Michigan, calls this “topping off the bracket.” Continuing this strategy for several years could result in a healthy, tax-free Roth IRA and much lower taxes as age-related RMDs increase. That is especially true, he points out, if one half of a couple dies and the other must file as a single person.

There are several other reasons to do a late-in-life Roth conversion.



If you are required to take RMDs from your IRA or other tax-advantaged plan but you don’t need the cash, use that money to make charitable donations. If you give that money directly to the charity, it will save you from having to pay taxes on it, says LaBrecque.

You can contribute up to $100,000 per year. Because you don’t receive the income, you don’t pay taxes at the federal level and in most states.

RATE SEARCH: Looking for a high-yielding savings account? Compare rates at Bankrate.com now.



Here’s another piece of advice for those who are inclined to be generous at the end of the year. Don’t sell stock and give cash. Donate the appreciated securities instead.

That way, you can get a deduction for the full fair market value of the stock. Plus, you don’t have to pay capital gains taxes.

“If you do it that way, you get the maximum benefit and you don’t have to pay taxes on the donation,” says Fidelity’s Sweeney.