Tag: taxes

RMD Questions Answered – Timing, Taxes, and Inheritance

Posted on by Brian Colvert

RMDs tend to show up quietly on the retirement timeline, and then suddenly they feel very loud. One year you are simply managing your investments. The next, the IRS is telling you that money must come out, whether you need it or not. For many people, that is where the confusion starts.

When exactly do RMDs begin? How much do you have to take? How are they taxed? And what happens if those accounts are still around when your kids inherit them?

Today we break down the most common questions we hear about RMDs and clear up the misconceptions that often lead to costly mistakes.

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What Are RMDs and Why Do They Exist?

RMDs, or Required Minimum Distributions, apply to retirement accounts that received a tax benefit upfront. These include traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs.

The government allowed you to deduct contributions or defer taxes while the money grew. RMDs are the mechanism that eventually forces a portion of that money back onto your tax return.

A common misconception is that once RMDs begin, the entire account becomes taxable. That is not true. Only a calculated portion of the account must be distributed each year.

When Do RMDs Start?

Under current rules, RMDs generally begin at age 73. If you were born after 1960, that age increases to 75.

The year you reach your RMD age is the year the requirement starts. It does not matter if your birthday is early in the year or late in the year. That year counts.

There is one important planning nuance. Your very first RMD can be delayed until April 15 of the following year. This flexibility can be helpful, but it also creates a potential tax trap.

If you delay the first RMD, you will still need to take your second RMD by December 31 of that same year. That means two taxable distributions in one calendar year. Depending on your income, that could push you into a higher tax bracket or affect Medicare premiums.

This is why RMD timing decisions should be made intentionally, not automatically.

How Are RMDs Calculated?

RMDs are based on:

  • Your account balance on December 31 of the prior year

  • Your age

  • IRS life expectancy tables

The IRS essentially estimates how many years you have remaining and requires that a portion of the account be distributed each year. As you age, the required percentage gradually increases.

This also means that market performance matters. If your account grows, your future RMDs may increase as well, even if you are withdrawing money each year.

How Are RMDs Taxed?

RMDs are taxed as ordinary income, just like wages or business income.

If your income is $100,000 and you take a $25,000 RMD, your gross income becomes $125,000. That additional income can ripple through your entire tax picture, affecting tax brackets, Medicare premiums, and deductions or credits.

One planning strategy that often gets overlooked is the Qualified Charitable Distribution, or QCD.

Once you reach age 70½, you can direct up to $100,000 per year from your IRA directly to a qualified charity. That distribution still counts toward your RMD but is not included in your taxable income.

This can be especially powerful for people who are charitably inclined but no longer itemize deductions.

Recordkeeping is critical here. Most custodians report only the total amount distributed, not how much was taxable. The burden is on you and your CPA to properly document charitable distributions.

Do Roth IRAs Have RMDs?

Roth IRAs do not have RMDs during the original owner’s lifetime.

Because taxes were paid upfront, the IRS does not require withdrawals later. This gives Roth accounts a unique level of flexibility and makes them valuable tools for both retirement income planning and estate planning.

It is also why Roth balances are often preserved for later years or passed on to heirs rather than spent early in retirement.

What Happens to Your IRA When You Pass Away?

This is where RMD planning intersects with estate planning.

If your spouse inherits your IRA, the account typically becomes theirs and is treated as their own. RMDs are then based on your spouse’s age and situation.

If the account passes to children or other non-spouse beneficiaries, the rules change significantly.

Most inherited IRAs are now subject to the 10-year rule. This means the entire account must be distributed within 10 years of the original owner’s death. Withdrawals are taxable to the beneficiary as ordinary income.

RMDs during that 10-year window, if required, are usually not enough to fully empty the account. Beneficiaries must plan additional withdrawals, often during their highest earning years.

This is why inherited IRAs frequently create unexpected tax consequences for families.

Can Roth Conversions Reduce Future RMD Issues?

In some cases, yes.

Roth conversions allow you to pay taxes now in exchange for tax-free growth later. If you expect your heirs to be in higher tax brackets than you, converting some assets to Roth during your lifetime may reduce the overall tax burden on your family.

That said, Roth conversions are not universally beneficial. They require careful analysis of current tax rates, future income, cash flow, and estate goals. Sometimes the numbers work beautifully. Other times they do not.

The key is running the analysis rather than relying on assumptions.

The Bigger Picture With RMDs

RMDs are not just a retirement rule. They are a tax planning issue, a cash flow decision, and an estate planning consideration all at once. Handled well, they can be managed smoothly and strategically. Ignored or misunderstood, they can create unnecessary taxes and stress later on.

If you want to understand how RMDs apply to your situation, how they fit into your broader plan, or whether strategies like charitable giving or Roth conversions make sense, we are happy to help.

You can listen to the full podcast episode for a deeper discussion, or reach out to our team  to talk through your specific circumstances.

Tax-Efficient Investing: How to Lower Your Tax Bill Without Sacrificing Growth

Posted on by Brian Colvert

If there is one thing nearly everyone agrees on, it is this: no one wants to pay more in taxes than they have to. Most people are perfectly willing to pay their fair share, but very few are excited about overpaying due to poor planning or missed opportunities. That is where tax-efficient investing comes in.

Tax-efficient investing is not about gimmicks, loopholes, or aggressive schemes involving flights to the Cayman Islands. It is about making smart, intentional decisions around where you invest, how those investments are structured, and when taxes are paid. When done correctly, tax-efficient investing can help you keep more of what you earn while still growing your wealth over time.

Today we are breaking down tax-efficient investing in a practical, real-world way. We will walk through the core concepts, the most effective strategies, and the accounts and investment types that tend to work best. The goal is not perfection. The goal is progress and clarity.

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What Is Tax-Efficient Investing?

At its core, tax-efficient investing is the process of structuring your investments in a way that minimizes unnecessary taxes over time while still supporting your long-term financial goals.

This is different from tax planning, which often focuses on deductions, credits, or one-time strategies tied to a specific tax year. Tax-efficient investing is ongoing. It is embedded in how your portfolio is built and how it evolves.

Tax-efficient investing answers questions like:

  • Should I focus on lowering my taxes now or later?

  • Which accounts should hold which types of investments?

  • How can I reduce taxes on growth, income, and withdrawals?

  • How do taxes affect my real, after-tax return?

The answers are not the same for everyone. Your age, income, tax bracket, goals, and time horizon all matter. That is why tax-efficient investing is rarely an all-or-nothing decision.

The Two Sides of Tax-Efficient Investing

Most tax-efficient investing strategies fall into one of two categories:

  1. Saving taxes today

  2. Saving taxes in the future

These two goals often compete with each other.

If you aggressively reduce taxes today, you may create a larger tax burden later. If you focus entirely on future tax savings, you may pay more than necessary right now. The key is finding the right balance.

Think of it like a sliding scale. You move it back and forth based on your situation. There is no universal “perfect” setting. The right approach is the one that aligns with your goals, income, and tolerance for risk.

Why Account Selection Matters More Than Most People Realize

One of the most overlooked aspects of tax-efficient investing is account selection. Many investors focus heavily on what they invest in, but not enough on where those investments live.

In reality, the same investment can produce very different after-tax results depending on the account it is held in.

Before getting into specific investment strategies, it is important to understand that tax efficiency often starts with choosing the right accounts in the right order.

Roth Accounts: The Foundation of Tax-Efficient Investing

If there is one place many advisors start when discussing tax-efficient investing, it is the Roth account.

Roth IRAs and Roth 401(k)s are powerful because:

  • Contributions are made with after-tax dollars

  • Growth is tax-free

  • Qualified withdrawals are tax-free

Once money is inside a Roth account, it is essentially removed from future tax calculations.

Why Time Matters So Much With Roth Accounts

The biggest advantage of Roth accounts is time. The longer your money has to grow tax-free, the more powerful the benefit becomes.

For younger investors, Roth accounts can be one of the most effective tax-efficient investing tools available. Even for older investors, Roth accounts can still play a valuable role, especially in estate planning and long-term flexibility.

While Roth accounts may not always reduce your tax bill today, they can dramatically reduce taxes later. That future flexibility is often underestimated.

Health Savings Accounts: The Triple Tax-Free Tool

When it comes to tax-efficient investing, Health Savings Accounts (HSAs) are often one of the most underutilized tools available.

An HSA offers:

  • Tax-deductible contributions

  • Tax-free growth

  • Tax-free withdrawals when used for qualified medical expenses

That combination makes HSAs unique. No other account offers all three benefits at once.

HSAs as Long-Term Investment Vehicles

Many people view HSAs as short-term medical spending accounts. In reality, they can be powerful long-term investment tools.

By contributing to an HSA, investing the funds, and paying current medical expenses out of pocket, you can allow the account to grow over decades. Later in life, when healthcare costs tend to rise, you have a built-in tax-free resource.

From a tax-efficient investing perspective, HSAs are often second only to Roth accounts in terms of overall benefit.

What Comes After Roths and HSAs?

Once Roth accounts and HSAs are fully utilized, many investors still have additional money to invest. This is where taxable brokerage accounts come into play.

Taxable accounts do not offer tax-free growth, but they can still be managed in tax-efficient ways.

Taxable Brokerage Accounts and Capital Gains

In a taxable brokerage account:

  • You pay taxes on dividends and interest as they are earned

  • You pay capital gains tax when investments are sold at a profit

The key distinction is how long the investment is held.

Short-term gains, typically assets held for less than one year, are taxed at ordinary income rates. Long-term gains are taxed at more favorable capital gains rates.

This makes long-term investing an important part of tax-efficient investing in taxable accounts.

Tax Loss Harvesting: Turning Losses Into Opportunities

One of the most effective tax-efficient investing strategies in taxable accounts is tax loss harvesting.

Tax loss harvesting involves:

  • Selling investments that are at a loss

  • Using those losses to offset gains elsewhere in the portfolio

  • Potentially reducing or eliminating taxes owed

This strategy can also help with portfolio rebalancing and risk management. When done correctly, it allows investors to stay invested while improving after-tax outcomes.

Tax loss harvesting is not about market timing. It is about being intentional and opportunistic within a long-term plan.

Rebalancing and Risk Control

Tax-efficient investing is not only about taxes. It is also about maintaining the right level of risk.

Over time, certain investments may grow faster than others. Rebalancing helps keep your portfolio aligned with your target allocation. When combined with tax loss harvesting, rebalancing can be done in a more tax aware manner.

This is another example of how tax efficiency and investment discipline often work together.

Municipal Bonds and Tax-Free Income

For investors who need income or prefer a more conservative approach, municipal bonds can play a role in tax-efficient investing.

Municipal bond interest is generally:

  • Exempt from federal income tax

  • Often exempt from state income tax if issued within your home state

This makes municipal bonds particularly attractive for investors in higher tax brackets who are seeking income without increasing their tax bill.

CDs and Treasury Ladders

For very conservative investors, fixed income options like CDs and Treasury securities may be appropriate.

Treasury interest is:

  • Subject to federal tax

  • Exempt from state tax

In certain states, this state tax exemption can make Treasuries more attractive than CDs. While these investments may not offer high returns, they can still be structured in a tax-efficient way depending on your location and goals.

Real Estate and Depreciation

Real estate is often discussed in the context of tax efficiency due to depreciation benefits.

Depreciation can:

  • Reduce taxable income

  • Offset rental income

  • Improve after-tax cash flow

That said, real estate is not inherently tax-efficient for everyone. It involves leverage, management, and market risk. It should be evaluated as an investment first, with tax benefits as a secondary consideration.

Aggressive Tax Strategies and Why Caution Matters

Some investments are heavily marketed for their tax advantages, such as oil and gas partnerships or certain alternative investments.

While these options can be tax efficient, they are often:

  • High risk

  • Illiquid

  • Highly variable in outcomes

Tax-efficient investing should never start with the tax benefit alone. The investment itself must make sense first. Taxes are important, but they should not drive the entire decision.

Insurance-Based Strategies and Who They Are For

Certain insurance products, such as indexed universal life policies, are sometimes positioned as tax-efficient investing tools.

These strategies can:

  • Offer tax-deferred growth

  • Provide downside protection

  • Create tax-free access under specific conditions

However, they are complex and typically best suited for individuals with:

  • Very high income

  • Long time horizons

  • Stable cash flow

These tools are not necessary for most investors, but they can be effective in niche situations when used appropriately.

Putting It All Together: A Practical Framework

A simplified framework for tax-efficient investing often looks like this:

  1. Maximize Roth accounts when possible

  2. Fund and invest an HSA if eligible

  3. Use taxable accounts strategically with tax loss harvesting

  4. Consider municipal bonds or Treasuries for tax-efficient income

  5. Evaluate alternatives only after core strategies are in place

This approach prioritizes simplicity, flexibility, and long-term results.

Tax-Efficient Investing Is Personal

One of the most important things to remember about tax-efficient investing is that it is highly personal. What works for one investor may not work for another. Age, income, tax bracket, career trajectory, and goals all matter.

There is no universal blueprint. The best tax-efficient investing strategy is the one that fits your situation and evolves as your life changes.

Final Thoughts

Tax-efficient investing is not about perfection. It is about making thoughtful decisions that reduce friction between your investments and your taxes.

By focusing on the right accounts, the right investment placement, and the right balance between today and tomorrow, you can improve your after-tax returns without taking unnecessary risks.

If you are unsure where to start, we can help bring clarity and confidence to the process. Schedule a call with us today.

The goal is simple: keep more of what you earn and let your money work harder for you over time.

Charitable Giving Strategies to Maximize Your Tax Deductions

Posted on by Brian Colvert

Charitable Giving Strategies

When it comes to giving, generosity and good planning often go hand in hand. The joy of supporting causes you care about is its own reward, but when done strategically, it can also create meaningful tax advantages. With several tax changes coming, there’s never been a better time to revisit your approach to charitable giving.

Today, we’ll break down smart charitable giving strategies to help you give intentionally, reduce your tax bill, and make a greater impact on the organizations you care about most.

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Why Timing Matters: Planning Your Giving

Tax laws ebb and flow, and timing can make a real difference in how much benefit you receive from your charitable contributions. If you’ve been thinking about opening a Donor-Advised Fund (DAF), bunching your deductions, or gifting from your IRA, now may be the sweet spot to act.

Because of upcoming changes to deduction thresholds and standard deduction amounts, what you give, and when, can significantly affect your tax outcome. Waiting until next year could mean leaving money on the table. By planning ahead, you can align your giving with the years that will produce the largest tax impact.The Power of Donor-Advised Funds

One of the most flexible charitable giving strategies is the Donor-Advised Fund (DAF). A DAF allows you to make a large charitable contribution in one year, receive an immediate tax deduction, and then recommend grants to your favorite charities over time.

If you typically take the standard deduction and don’t have enough itemized deductions to exceed it, a DAF can help. By “bunching” several years’ worth of charitable giving into one year, you can itemize in that year and potentially claim a much larger deduction — while still supporting your causes in future years through the fund.

Example:
If you usually donate $10,000 each year, consider giving $30,000 to a DAF in 2025. You’ll receive the full deduction in 2025, then distribute that money to charities gradually over the next few years.

It’s a way to amplify your tax savings without changing your charitable goals.

Qualified Charitable Distributions (QCDs): A Win-Win for Retirees

For those over age 70½, one of the most underused charitable giving strategies is the Qualified Charitable Distribution (QCD).

A QCD allows you to donate up to $105,000 per year directly from your IRA  (check here for the current year’s limits) to a qualified charity. The key advantage is that the amount given is excluded from your taxable income. This is especially valuable if you’re already taking Required Minimum Distributions (RMDs,  since a QCD can satisfy all or part of that RMD without increasing your taxable income.

This approach doesn’t just reduce your tax bill; it can also keep your adjusted gross income lower, which may help you avoid Medicare surcharges or taxation on Social Security benefits.

Quick facts about QCDs:

  • You must be at least 70½ years old at the time of the distribution.

  • The gift must go directly from your IRA to the charity.

  • You can give up to $105,000 per person per year in 2025.

  • The charity must be a qualified 501(c)(3) organization — not a private foundation or donor-advised fund.

A practical tip

If your IRA is held at Schwab, you can even write checks directly to the charity from your IRA account. Just remember: the funds must already be in cash, not invested, or the check could bounce.

It’s a simple, elegant way to give and one that can significantly enhance your retirement-age tax efficiency.

Avoiding Common QCD Mistakes

Even the most generous donors can lose out on tax savings if they overlook the details. Here are a few pitfalls to avoid:

• Forgetting to track your QCDs on your tax return.
Your IRA custodian will issue a 1099-R showing your total distributions, but they won’t specify how much was donated. It’s up to you (or your CPA) to note the amount that was given as a QCD so it isn’t counted as taxable income.

• Writing the check before ensuring cash is available.
In an IRA, investments must be sold before cash becomes available. Confirm your balance before writing your QCD check.

• Giving through the wrong type of account.
QCDs only work for IRAs , not 401(k)s or donor-advised funds. If you’re planning to give from another account, talk with your advisor about rolling funds into an IRA first.

Small mistakes can make a big difference come tax time, so double-checking the details can protect your deduction and avoid unpleasant surprises.

Combining Giving with Retirement Planning

For retirees or those approaching retirement, charitable giving can be more than just generosity ,  it can be part of a broader income and estate plan.

A few key charitable giving strategies to consider:

• Coordinate QCDs with your RMDs.
If you don’t need your RMD income for living expenses, direct it straight to charity. You’ll meet your distribution requirement and avoid adding to your taxable income.

• Donate appreciated assets.
Instead of selling stocks or mutual funds and paying capital gains, you can donate the shares directly. You’ll avoid the capital gains tax and may still receive a deduction for the full fair market value.

• Create a charitable remainder trust (CRT).
If you’d like to generate income while still giving back, a CRT allows you to donate assets, receive a partial tax deduction, and collect income for life or a set term with the remainder going to charity.

Strategic giving lets you support what you care about while strengthening your overall financial plan.

Why Timing Matters in your Charitable Giving Strategy

Tax laws and deduction thresholds are always evolving, which means the timing of your charitable contributions can make a meaningful difference.

If you’ve been thinking about setting up a donor-advised fund, making a larger contribution, or simply becoming more intentional with your giving, taking action sooner rather than later can often lead to greater tax advantages.

Waiting too long to implement your plan can mean missing out on opportunities under the current rules. You’re not losing the opportunity to give, you’re just leaving some chips on the table if you wait.

Important Tip: Keep Good Records

The IRS requires documentation for any charitable contribution you plan to deduct, regardless of size. Always keep:

  • Donation receipts or acknowledgment letters from charities

  • Records of QCD checks or transfers from your IRA

  • Details of any appreciated assets donated (including cost basis and fair market value)

Your CPA will need these records at tax time to ensure your deductions are correctly applied and your income accurately reported.

Matching Your Giving to Your Values

Financial planning isn’t just about numbers, it’s about aligning your resources with what matters most to you. Charitable giving is one of the most rewarding ways to make that connection tangible.

Ask yourself:

  • Which causes have shaped your life or your family’s story?

  • What impact do you want to leave behind?

  • How can your financial plan make those goals real?

When giving is built into your plan, it stops being a once-a-year consideration and becomes part of a long-term legacy.

How Bonfire Financial Helps Clients Build a Giving Plan

At Bonfire Financial, we believe that true wealth includes the ability to give generously. Our advisors help clients create customized giving strategies that align with their financial goals, tax situation, and personal values.

Here’s what that might look like:

  • Reviewing your charitable history and identifying missed opportunities for deductions

  • Coordinating your CPA and investment accounts for smooth execution of QCDs or DAF contributions

  • Timing gifts for maximum tax efficiency, especially ahead of any new rule changes

  • Helping you decide whether to give cash, appreciated assets, or IRA distributions

By taking a proactive approach, you can make every dollar of generosity go further, both for your finances and your favorite causes.

Small Steps, Big Impact

Even modest contributions can create a significant difference over time, especially when combined with thoughtful planning. Whether you’re contributing monthly through your IRA, setting up automatic grants from a donor-advised fund, or gifting shares of appreciated stock, each move adds up to a meaningful impact.

The goal isn’t just to give,  it’s to give wisely.

Final Thoughts: Plan Well, Give Generously

Charitable giving is one of the few financial strategies that truly benefits everyone involved. You help organizations that matter to you, potentially reduce your tax bill, and reinforce a sense of purpose and gratitude in your financial life.

As tax laws evolve, so should your giving plan. Review your strategy annually, especially before major tax. With the right plan, you can give more effectively, reduce your taxes, and create a legacy that reflects your values.

Ready to Create Your Charitable Giving Strategy?

If you’d like help evaluating your options or setting up a tax-efficient giving plan, our team at Bonfire Financial can walk you through the details. From donor-advised funds to QCDs and beyond, we’ll help you make the most of your generosity.

👉 Schedule a consultation today to get started.

Breaking Down the Big Beautiful Bill: Tax Cuts and Opportunities

Posted on by Brian Colvert

Tax Opportunities in the Big Beautiful Bill

The passage of the One Big Beautiful Bill Act marked a major shift in retirement and tax planning strategies across the country. Officially passed in 2024, this sweeping legislation introduced the Big Beautiful Bill tax cuts, which have far-reaching implications for retirees, pre-retirees, and anyone looking to secure a more tax-efficient financial future.

Today, we’re breaking down the most important elements of the Big Beautiful Bill tax cuts and what they mean for your financial plan. Whether you are already retired or planning to retire soon, this guide will help you understand the new rules and show you how to take advantage of them.

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Why the Big Beautiful Bill Tax Cuts Matter

Tax policy affects every part of your retirement plan, from how much you pay now to how much you get to keep later. The One Big Beautiful Bill Act has made several changes that reward proactive planning, particularly for those who understand how to leverage deductions, tax brackets, and Roth conversions.

If you are wondering what the headlines mean for you, read on. The Big Beautiful Bill tax cuts could offer you significant opportunities, but only if you act before key provisions sunset.

Locked-In Tax Brackets: Clarity for Long-Term Planning

One of the standout provisions of the bill is the permanent locking in of the 2017 tax brackets. This includes:

  • Expansion of the 24 percent tax bracket
  • Continuation of higher standard deductions

For retirees, this is big news. Why? Because it removes the uncertainty surrounding tax bracket “sunsets” that were originally baked into earlier tax law changes. With stable brackets, you can now plan with confidence for the years ahead.

This consistency is especially helpful for strategies like Roth conversions, where timing and tax bracket forecasting are critical. Knowing your future tax rates allows you to take deliberate action now, instead of speculating on what might happen years down the road.

In addition to Roth conversions, having locked-in brackets makes income planning, charitable giving, and capital gains strategies more effective. Retirees can plan their withdrawals with more precision, minimizing tax surprises and maximizing tax-efficient income streams.

Action Steps:

  • Review your current and projected retirement income
  • Work with your financial advisor to determine if partial Roth conversions make sense given your new bracket stability

SALT Deduction Increase: A Temporary but Valuable Window

The One Big Beautiful Bill Act also increases the State and Local Tax (SALT) deduction cap from 10,000 to 40,000. This expanded deduction is significant, but it comes with an expiration date of 2028.

This change is especially beneficial to taxpayers in high-tax states or those with incomes under 500,000. If you are thinking about accelerating deductible expenses, making charitable contributions, or converting traditional retirement accounts to Roth IRAs, this higher deduction gives you more room to maneuver.

In many cases, combining the higher SALT deduction with strategic Roth conversions can result in substantial long-term tax savings. By using the deduction to offset taxable income from conversions, retirees may be able to shift significant assets into Roth accounts with a lower immediate tax cost.

Action Steps:

  • Calculate your itemized deductions for 2025 through 2027
  • See if bundling deductions, charitable giving, or Roth conversions during this window will help you take full advantage

Bigger Standard Deductions for Seniors

If you are over age 65, the Big Beautiful Bill tax cuts get even better. The Act includes an additional standard deduction of:

  • 6,000 for individuals
  • 12,000 for married couples filing jointly

This increase is stacked on top of the regular standard deduction, further lowering your taxable income. For retirees, this can create a strategic opening to convert traditional retirement accounts to Roth IRAs while remaining in a lower bracket.

Remember, money in Roth accounts grows tax-free and is not subject to required minimum distributions (RMDs). With higher deductions, you can potentially convert more without pushing yourself into a higher bracket.

Additionally, this larger deduction makes it easier for retirees to avoid paying taxes on Social Security benefits or capital gains. When properly planned, these tax savings can compound year after year.

Action Steps:

  • If you are 65 or older, review your adjusted gross income (AGI) and consider Roth conversions or harvesting gains within the new deduction limits

Estate Tax Exemption Increase: Breathing Room for Legacy Planning

Another major highlight of the One Big Beautiful Bill Act is the increase in the estate tax exemption to 15 million per individual or 30 million per couple. This move takes estate tax concerns off the table for the vast majority of Americans.

If your estate is approaching that threshold, now is the time to take advantage of gifting strategies, trusts, and other estate planning tools while the exemption is still high. There is always a possibility that future legislation could reduce this exemption, making it critical to act while the current rules are in place.

You can also use this time to transfer assets to heirs in a tax-efficient way, locking in current valuation levels and removing future growth from your taxable estate.

Action Steps:

  • Speak to your estate attorney or advisor about legacy planning strategies, especially if you own appreciating assets or a business

Medicare and Social Security: Future Uncertainties

While the Big Beautiful Bill tax cuts have many upsides, there are whispers of future funding issues related to Medicare and Social Security. The bill opens the door for potential restructuring in the coming years.

The concern? Future generations might face increased retirement ages or income-based benefit reductions. However, the majority of current beneficiaries likely will not see cuts anytime soon.

The political reality is that seniors make up a significant portion of the voting population, making it unlikely that Congress would enact sweeping cuts that affect current retirees. Still, it is wise to remain aware and plan accordingly.

Action Steps:

  • Continue monitoring Medicare and Social Security changes, but do not make major adjustments based on speculation
  • Keep your retirement plan updated annually to account for any changes

Additional Planning Tips to Maximize the Big Beautiful Bill Tax Cuts

  1. Bunch Deductions Strategically: Use years with higher income or conversions to bunch deductions like charitable contributions and medical expenses.
  2. Harvest Capital Gains: Consider realizing long-term capital gains up to the top of the 0 or 15 percent capital gains bracket.
  3. Leverage Donor-Advised Funds: Use Donor-Advised Funds to frontload multiple years of giving while maximizing itemized deductions.
  4. Set Up Qualified Charitable Distributions (QCDs): If you are 70.5 or older, you can donate directly from your IRA to a qualified charity, reducing your taxable income.
  5. Coordinate With Your CPA: Tax efficiency is best achieved when your advisor and CPA work together on a comprehensive strategy.

Key Takeaways and Next Steps

Here are the biggest things to remember about the Big Beautiful Bill tax cuts:

  1. Locked-in tax brackets allow for more confident long-term tax planning.
  2. The expanded SALT deduction is a limited-time opportunity that expires in 2028.
  3. Bigger standard deductions for seniors can create room for strategic income moves.
  4. Estate tax exemption increase provides flexibility in legacy planning.
  5. Stay grounded when it comes to Medicare and Social Security projections.
  6. Use this window of opportunity to be proactive with Roth conversions, charitable giving, and estate planning.

What You Can Do Right Now:

  • Schedule a retirement planning session with a qualified financial advisor
  • Run projections for Roth conversions over the next three to five years
  • Update your estate plan to reflect the new exemption amounts
    Take advantage of expanded deductions while they are still available
  • Coordinate tax strategies with your financial advisor and CPA for maximum benefit

Final Thoughts: Use the Big Beautiful Bill Tax Cuts to Your Advantage

Legislation like the One Big Beautiful Bill Act does not come along often, and when it does, the people who benefit most are those who act early and plan smart.

These tax cuts and deduction increases open a door for retirees to reduce tax burdens, preserve wealth, and create a more stable financial future. But these benefits will not last forever. With some provisions sunsetting in just a few years, now is the time to take action.

At Bonfire Financial, we specialize in helping retirees and pre-retirees build smart, tax-optimized financial plans. If you are unsure how to take advantage of the Big Beautiful Bill tax cuts, we are here to help.

>>> Schedule your personalized planning session today!

Stay informed, stay empowered, and make the most of every opportunity the One Big Beautiful Bill Act has to offer.

Roth Conversion Strategies: Build Wealth for Your Family, Not the IRS

Posted on by Brian Colvert

When it comes to building wealth and leaving a financial legacy, most people focus on how much they can accumulate. But what many overlook is how much of that money will actually reach their family, and how much could end up going to the IRS instead.

One of the most powerful yet underutilized strategies in estate and tax planning is Roth conversion strategies. While often discussed in the context of retirement planning, Roth conversions can play a key role in reducing the future tax burden on your heirs and maximizing the impact of the wealth you leave behind.

Today we’ll break down exactly how Roth conversions work, why they’re valuable for estate planning, and how to decide whether this strategy is right for you.

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What Is a Roth Conversion?

A Roth conversion is the process of transferring money from a traditional retirement account (like a traditional IRA or 401k) into a Roth IRA. When you make the conversion, you pay ordinary income tax on the amount you transfer, but after that, the funds grow tax-free, and withdrawals are also tax-free, assuming the account has been open for at least five years and you’re over age 59½.

People often use Roth conversions when they expect to be in a higher tax bracket later or want to maximize tax-free income in retirement. But there’s another layer to this strategy: reducing the tax burden on your heirs.

Why Roth Conversions Matter for Estate Planning

Thanks to recent tax law changes under the SECURE Act and SECURE 2.0, inherited IRAs now come with a strict timeline. If a non-spouse (such as a child) inherits your IRA, they must withdraw all the funds within 10 years, and those withdrawals are taxed as ordinary income.

This is a big shift from the previous “stretch IRA” rule that allowed beneficiaries to spread withdrawals over their lifetime. The new 10-year rule compresses the tax liability into a much shorter period, often hitting heirs during their peak earning years.

For example, let’s say your child earns $120,000 annually and inherits a $500,000 IRA. Instead of spreading withdrawals out over decades, they have to withdraw all the funds within 10 years. That could push their income over $170,000 in a given year, bumping them into a much higher tax bracket and significantly reducing what they ultimately get to keep.

By converting portions of your IRA to a Roth IRA during your lifetime, you pay the taxes now, and your heirs inherit an account that grows tax-free and can be withdrawn tax-free. Even though they still have to empty the account within 10 years, the absence of taxes makes it far more beneficial.

Real-World Example: A Client’s Legacy in Action

We recently worked with a client who brought her adult son to a financial planning meeting. She was a single woman in her 70s, financially secure, and had no need to rely on her IRA for living expenses. Her son, a successful professional, was in a significantly higher tax bracket than she was.

If she left her IRA untouched and passed away, her son would inherit a sizable sum and an equally sizable tax bill. Not only would he need to withdraw hundreds of thousands of dollars within a decade, but each withdrawal would be taxed at his current income rate.

By contrast, if she slowly converted the IRA into a Roth over a period of several years, carefully keeping each conversion within her lower tax bracket, she could shoulder the tax bill at her lower rate, allowing her son to inherit a Roth IRA instead. He would still need to withdraw the funds within 10 years, but he wouldn’t owe a dime in taxes.

The approach of evaluating Roth conversion strategies not only preserved more of the money for her family, but it gave them more flexibility and peace of mind during an emotionally difficult time.

Understanding the Tax Bracket “Fill” Strategy

One of the most practical ways to approach Roth conversions is through “tax bracket filling.” The idea is to make use of your current marginal tax bracket without tipping into the next one.

Here’s how it works:

Let’s say you’re a single filer with $60,000 in taxable income. The 22% federal income tax bracket in 2025 goes up to about $95,375. That means you could convert up to $35,375 of IRA money and still stay within the 22% bracket.

By “filling the bracket” with Roth conversions, you can transfer funds without triggering a jump into a higher tax tier. This is especially effective if you’re in a low-tax phase of life, such as early retirement, before taking Social Security or required minimum distributions (RMDs).

This strategy is repeatable year after year and can gradually shift large portions of your traditional IRA into a Roth IRA while minimizing your total lifetime tax liability.

Why Timing Matters for Roth Conversions

The effectiveness of a Roth conversion strategy often comes down to timing. The most advantageous window tends to be:

  • After retirement but before you begin collecting Social Security

  • Before you are required to take RMDs at age 73 (or 75, depending on your birth year)

  • During years when your income is temporarily lower (job transition, business loss, early retirement, etc.)

In these windows, your marginal tax rate may be much lower than what it will be in future years, or what your heirs will face.

It’s also important to think about where tax policy is heading when considering Roth conversion strategies. Many financial professionals believe federal income taxes are likely to increase in the coming decades due to growing national debt and budget deficits. Paying taxes today, when rates are relatively low, could be a smart long-term decision.

A Closer Look at the 10-Year Inheritance Rule

The SECURE Act’s 10-year rule means that non-spouse beneficiaries must completely drain an inherited IRA within a decade. While there’s no rule that says the withdrawals must be taken evenly each year, they must be completed by the end of year 10.

The downside? If the heir waits too long and takes a large lump sum at the end of the 10 years, it could cause an enormous tax spike.

This rule does not apply to Roth IRAs in the same way. Beneficiaries still have to follow the 10-year withdrawal rule, but distributions are tax-free, as long as the Roth account has been open for at least 5 years.

That means your heirs can:

  • Let the money grow tax-free for up to a decade

  • Withdraw it at a time that suits their financial situation

  • Avoid adding taxable income during their highest-earning years

Who Should Consider Roth Conversions for Estate Planning?

Roth conversion strategies are especially effective for individuals who meet the following criteria:

1. Retired and in a lower tax bracket than their children
If your income has decreased but your children are in their peak earning years, it makes sense for you to pay the taxes now so they don’t get hit with a much larger tax bill later.

2. Financially secure and not dependent on IRA withdrawals
If you don’t need your traditional IRA for day-to-day expenses, you can afford to strategically convert and handle the tax costs over time.

3. Planning to leave a large IRA to heirs
The larger the IRA, the greater the potential tax burden on your beneficiaries. Roth conversions reduce this future liability.

4. Wanting to reduce estate size for tax purposes
While estate tax only affects a small percentage of families, converting to a Roth can reduce your estate’s taxable size while still preserving value for your heirs.

5. Believing tax rates will go up in the future
If you suspect federal income tax rates will increase over the next 10–20 years, locking in today’s lower rates could be a wise move.

When Roth Conversions Might Not Make Sense

Like all financial planning tools, Roth conversions aren’t right for everyone. Situations where it might not be ideal include:

You need the money now
If you rely on your IRA for income, the added tax burden of a conversion might not be worth it.

You’re currently in a high tax bracket
If your current tax rate is higher than what your heirs will face, paying the taxes now may not make sense.

You plan to donate the IRA to charity
Qualified charities don’t pay taxes on IRA distributions. Leaving your IRA to a nonprofit could be more efficient than converting it to a Roth.

You can’t afford the taxes from the conversion
Ideally, taxes on a conversion should be paid from cash savings, not from the IRA itself. If you have to dip into the converted funds to cover the tax bill, the strategy loses a lot of its effectiveness.

Debunking Common Roth Conversion Myths

Let’s address a few common misunderstandings:

Roth conversions are only for young investors
Reality: Roth conversions can be especially effective for retirees and those doing estate planning, especially if their tax bracket is lower than their heirs’.

You’ll lose money by paying taxes now
Reality: Paying taxes now at a lower rate can save money in the long run, especially if future tax rates are higher.

Roth IRAs don’t help with inheritance planning
Reality: Roth IRAs can be a powerful inheritance tool, especially under the 10-year rule — no required taxes means more flexibility and value for your heirs.

How to Execute a Roth Conversion Estate Strategy

If you’re considering this strategy, here are a few key steps to follow:

Step 1: Run Projections
Work with a CFP® or tax professional to analyze your current and future tax brackets, your heirs’ tax situations, and your long-term retirement needs.

Step 2: Start Small and Be Strategic
Don’t convert your entire IRA in one year. Spread conversions over several years to manage your tax bracket and avoid triggering unintended Medicare or Social Security impacts.

Step 3: Use Non-IRA Funds to Pay the Taxes
To get the full value of the conversion, pay the taxes using cash from savings. That keeps the entire converted amount growing tax-free.

Step 4: Communicate Your Plan  
Make sure your heirs understand what you’ve done and why. Update your beneficiaries and document your estate plan accordingly.

Final Thoughts: Taxes Are Inevitable, But Smart Planning Isn’t

At the end of the day, the choice often comes down to this: Would you rather your money go to your family, or to the IRS?

Roth conversion strategies allow you to take control of that decision. When used strategically, they can reduce the long-term tax burden, offer more flexibility to your heirs, and help ensure that the wealth you worked so hard to build actually benefits the people you care about most.

It’s not a one-size-fits-all solution, but it’s one of the most powerful planning tools available if used at the right time, in the right way.

Need personalized Roth conversion strategies?

At Bonfire Financial, we help clients turn complex tax rules into smart, actionable strategies. We welcome you to schedule a call to see how Roth conversions could fit into your estate plan.

Beyond Tax Prep: Elevating Your Wealth Through Strategic Tax Planning with Max Pollack, CPA

Posted on by Brian Colvert

When it comes to managing your finances, taxes are often viewed as a chore—a once-a-year task that revolves around gathering documents, filling out forms, and submitting them to the IRS. However, as Max Pollock, CPA, points out in his recent interview on The Field Guide podcast, there’s a significant difference between tax preparation and strategic tax planning. Understanding this distinction could save you money, reduce stress, and help you achieve your financial goals.

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The Difference Between Tax Prep and Tax Planning

According to Max, tax preparation is largely a reactive process. It involves compiling your financial information and ensuring compliance with filing requirements. In contrast, tax planning is proactive. It’s about looking ahead, understanding your financial landscape, and strategizing to minimize your tax liability while maximizing your wealth.

For instance, if you’re considering a Roth Conversion—moving money from a traditional IRA to a Roth IRA—the timing and execution of that decision can have significant tax implications. Tax planning helps you navigate these scenarios, ensuring you make informed choices that align with your long-term goals.

Proactive and strategic tax planning also includes evaluating potential life changes, such as starting a business, purchasing real estate, or preparing for retirement. Each of these scenarios has unique tax implications that can be optimized through strategic planning.

Common Missteps and How to Avoid Them

One of the most common misconceptions Max encounters involves passive income versus active income. Many investors purchase rental properties, expecting substantial tax benefits through depreciation. However, income thresholds and phase-outs can limit these benefits, particularly for high earners. Understanding these nuances is critical to creating a successful tax strategy.

Another often-overlooked opportunity is the home office deduction. Post-COVID, more individuals work from home than ever before, yet many fail to take advantage of this legitimate tax break. By properly allocating expenses such as utilities and property taxes, you can optimize your deductions within the boundaries of the law.

Max also emphasizes the importance of knowing your eligibility for certain deductions and credits. For example, income phase-outs can limit your ability to take advantage of tax breaks, such as contributing to a Roth IRA or qualifying for certain child tax credits. Awareness of these thresholds allows you to plan accordingly and avoid surprises when filing your return.

Strategies for High-Net-Worth Individuals

For high-income families or those heavily invested in equities, planning becomes even more essential. Max highlights the importance of strategies like:

  • Trust Planning: Ensure your trust is properly funded and updated regularly to avoid wasted effort and costs. Many individuals spend significant resources creating trusts but fail to transfer assets into them, rendering the trusts ineffective.
  • Alternative Investments: Alternative investments like equity, real estate, and oil and gas ventures offer tax advantages, but due diligence is critical to mitigate risks. These investments often come with large upfront deductions, such as depreciation, but require careful consideration of long-term benefits and risks.
  • Charitable Giving: Leveraging tools like donor-advised funds or direct IRA contributions can maximize the impact of your donations while providing substantial tax benefits. Max suggests bundling charitable contributions into a single year to surpass the standard deduction and achieve meaningful tax savings.

Preparing for a Changing Tax Landscape

With new tax legislation on the horizon, it’s essential to stay informed and adaptable. Max advises keeping an eye on potential changes to income brackets, deduction limits, and other key provisions. For example, the sunset of the Tax Cuts and Jobs Act could lead to higher tax rates for many taxpayers unless Congress acts to extend these provisions. Check out the current year’s limits, tax brackets and more here.

In times of uncertainty, it’s crucial to work with a qualified tax professional who can help you navigate the evolving landscape. They can provide insights into proposed changes, evaluate their potential impact on your finances, and recommend strategies to minimize your tax liability.

Key Tax Planning Strategies for Families and Business Owners

Max shares several practical and strategic tax planning ideas that families and business owners can implement to optimize their tax situation:

  1. Leverage Retirement Accounts: Maximize contributions to tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs). These accounts not only reduce your taxable income but also allow your investments to grow tax-deferred or tax-free.
  2. Plan for Capital Gains: If you’ve accumulated significant gains in your investment portfolio, consider strategies like tax-loss harvesting or gifting appreciated securities to charity. These tactics can help offset your gains and reduce your tax burden.
  3. Utilize Depreciation: For real estate investors, cost segregation studies can accelerate depreciation deductions, providing substantial tax savings in the early years of ownership.
  4. Optimize Business Deductions: Business owners should take full advantage of deductions for expenses like equipment purchases, employee benefits, and travel. The Qualified Business Income (QBI) deduction also offers significant savings for eligible pass-through entities.
  5. Consider Family Foundations: Creating a family foundation allows you to make a large charitable contribution in one year, achieving immediate tax benefits while distributing funds to charitable causes over time.
  6. Bundle Deductions: Another effective strategy is to bundle deductions into a single year. For example, paying property taxes for two years within a single tax year can help surpass the standard deduction and maximize itemized deductions.

Navigating Audits and IRS Scrutiny

With the IRS increasing scrutiny on high-net-worth individuals, it’s more important than ever to maintain accurate records and work with a qualified CPA. Max advises taxpayers to:

  • Document Everything: Keep detailed records of income, expenses, and supporting documentation for deductions and credits.
  • Engage a CPA: Having a professional prepare and sign your tax return provides additional assurance and support in case of an audit.
  • Respond Promptly: If the IRS contacts you for additional information, respond quickly and professionally to avoid complications. A CPA can help you navigate this process and ensure compliance.

Max also highlights the importance of understanding red flags that might trigger audits, such as unusually large deductions or discrepancies in income reporting. By proactively addressing these issues, you can minimize the likelihood of IRS scrutiny.

Tax Planning for the Future

Looking ahead, Max advises staying informed about potential tax changes and incorporating flexibility into your financial plan. He also emphasizes the importance of long-term strategies, such as estate planning, to ensure your wealth is preserved for future generations.

For example, step-up in basis rules can significantly reduce capital gains taxes when assets are passed to heirs. By incorporating these strategies into your overall tax plan, you can create a more secure financial future for your family.

Final Thoughts

The smartest financial decisions stem from curiosity and preparation. As Max eloquently states, “The smartest person in the room is the one asking the questions.” By proactively engaging in tax planning, you can turn what feels like a daunting obligation into an opportunity to build and preserve wealth.

Whether you’re starting from scratch or refining your strategy, remember that tax planning is not just about compliance—it’s about setting yourself up for financial success. To hear more expert advice from Max Pollock, tune in to the full episode of The Field Guide podcast.

Tax planning is not a static process but a dynamic one that evolves with your financial goals and life changes. Embrace it as a tool to secure your financial future and unlock opportunities you may not have considered before.

If you’re ready to take your tax strategy to the next level or have questions about how strategic tax planning can benefit you, don’t hesitate to reach out to Max Pollock, CPA. With his expertise and personalized approach, Max can help you optimize your finances and achieve your long-term goals. Schedule a call with him today! 

Taxes in Retirement: Planning Ahead

Posted on by Brian Colvert

SMART TAX PLANNING IN RETIREMENT

Effective planning for taxes in retirement is paramount for retirees looking to maximize their financial security. Understanding the complexities of how different income sources are taxed can empower you to make informed decisions. This guide delves into strategies that can help reduce your tax liability and enhance your retirement income.

 

Understanding Retirement Tax Basics

Understanding the basics of taxes in retirement is crucial for effective financial planning. It can help ensure that you keep more of your hard-earned money during your golden years. As you transition from earning a salary to relying on various income sources in retirement, the way your income is taxed changes significantly. Retirement income can come from various sources, each with its own tax considerations. Familiarizing yourself with the tax treatment of 401ks, IRAs, pensions, and Social Security benefits is the first step toward efficient tax planning.

 

Types of Retirement Income

Retirement income can be categorized into three main types: taxable, tax-deferred, and tax-free. Each type has different tax implications that can affect your overall tax liability in retirement.

  • Taxable Income: This includes income from traditional investment accounts, rental properties, and part-time employment. It’s taxed at ordinary income tax rates, which range depending on your total taxable income for the year.
  • Tax-Deferred Income: Comes from accounts like traditional IRAs, 401ks, and other employer-sponsored retirement plans. Taxes on these accounts are deferred until you make withdrawals, which are then taxed as ordinary income. This can be advantageous because many people find themselves in a lower tax bracket in retirement compared to their working years.
  • Tax-Free Income: Roth IRAs and Roth 401(k)s provide tax-free income in retirement, provided certain conditions are met. Contributions to these accounts are made with after-tax dollars, meaning you don’t receive a tax deduction when you contribute. However, both the contributions and the earnings can be withdrawn tax-free in retirement.

 

How to Reduce Taxes on Retirement Income

Strategic withdrawals from tax-deferred and tax-free accounts can significantly lower your tax bill. This section outlines how timing and the order of withdrawals can impact your overall tax situation.

Managing Social Security Taxation

Managing the taxation on Social Security benefits is a pivotal aspect of optimizing your retirement income. The tax liability on these benefits hinges on your “combined income.” This encompasses your adjusted gross income, nontaxable interest, and half of your Social Security benefits. The intricacies of this taxation mean that up to 85% of your benefits could be taxable if your income surpasses certain thresholds. Navigating these waters requires a nuanced understanding of how different income streams interact and impact the taxation of your benefits, making it essential to strategize effectively to minimize the tax bite.

Strategic measures, such as timing the withdrawal of funds from retirement accounts and potentially delaying the onset of Social Security benefits, can significantly influence your tax situation. Drawing on Roth IRA savings, which offer tax-free withdrawals, can be a smart move to manage your combined income levels. Thereby reducing the taxable portion of your Social Security benefits. These strategies underscore the importance of a well-thought-out plan that considers the timing and source of your retirement income, aiming to secure a more tax-efficient stream of income in your retirement years.

Need help understanding your Social Security Benefits? Download our updated Free Social Security Guide!

The Role of Investment Income

The role of investment income in retirement planning is pivotal. It not only supplements your primary income sources like Social Security and pensions but also carries specific tax considerations that can significantly impact your overall tax liability and financial stability in retirement. By strategically managing capital gains, dividends, and interest from investments, retirees can optimize their tax situation, potentially benefiting from lower tax rates on long-term capital gains and qualified dividends, thus enhancing their income streams while minimizing tax expenses.

Navigating Required Minimum Distributions

Navigating Required Minimum Distributions (RMDs) is an essential aspect of retirement planning, particularly for those with tax-deferred retirement accounts like traditional IRAs and 401(k)s. Once you reach the age of 73, the IRS mandates that you begin taking these distributions, which are then taxed as ordinary income. The amount of the RMD is calculated based on the account balance and life expectancy, creating a potential tax impact by increasing your taxable income in retirement.

Properly managing RMDs involves strategic planning to minimize their effect on your tax bracket, such as considering Roth conversions before reaching RMD age to reduce future taxable income or employing strategies like Qualified Charitable Distributions (QCDs) to meet RMD requirements tax-free by directly transferring funds to a qualified charity. This careful approach to RMDs can help maintain a more favorable tax position and preserve retirement savings.

Utilizing Roth Accounts for Tax-Free Income

Utilizing Roth accounts for tax-free income is a strategic approach that can greatly benefit retirees. They offer a source of income that does not increase their tax burden. Contributions to Roth IRAs and Roth 401(k)s are made with after-tax dollars, meaning that while there are no tax deductions at the time of contribution, the withdrawals, including earnings, are tax-free in retirement as long as certain conditions are met.

This feature is particularly advantageous as it allows retirees to manage their taxable income more effectively. It can keep them potentially in a lower tax bracket and reduce or even eliminate taxes on Social Security benefits. Moreover, Roth accounts do not have Required Minimum Distributions (RMDs) during the account owner’s lifetime, providing further flexibility in planning and extending the tax advantages over a longer period. This makes Roth accounts a powerful tool in retirement income planning, offering tax diversification and the potential to optimize overall tax liability.

Estate and Gift Tax Planning for Retirement

Estate and Gift Tax Planning for Retirement is a critical strategy for managing how your assets will be distributed to your heirs while minimizing the tax impact on both your estate and the beneficiaries. This aspect of retirement planning involves understanding and navigating the complex rules surrounding estate and gift taxes, which can significantly affect the value of the assets transferred.

By leveraging annual gift exclusions, taking advantage of the lifetime estate and gift tax exemption, and setting up trusts or other estate planning tools, retirees can efficiently transfer wealth to their heirs or favorite charities, potentially reducing or eliminating estate taxes. Such planning ensures that more of your assets go to your intended recipients rather than to tax payments, preserving the financial legacy you wish to leave behind.

State-Specific Retirement Tax Considerations

State taxes can significantly affect your retirement finances. Each state has its own set of rules regarding income. Sales, property, and estate taxes can affect the overall tax burden on retirees. Some states offer favorable tax treatments, such as no state income tax, exemptions on Social Security income, or deductions for pension and retirement account withdrawals, making them attractive destinations for retirees. Understanding these differences is crucial for making informed decisions about where to live in retirement or how to allocate assets. Taking into account state-specific tax considerations can lead to substantial savings, enhancing the ability to maintain a desired lifestyle in retirement.

Healthcare Costs and Their Tax Implications

Healthcare Costs and their tax implications are a significant concern for retirees, given that healthcare expenses often increase with age. Navigating these costs requires an understanding of how they can affect your tax situation. For instance, certain healthcare expenses, including Medicare premiums and out-of-pocket costs for prescriptions, doctor’s visits, and medical procedures, can be deductible if they exceed a specific percentage of your adjusted gross income (AGI).

Leveraging a Health Savings Account (HSA), if eligible before enrolling in Medicare, offers a tax-advantaged way to save for and pay these expenses, with contributions being tax-deductible, growth tax-free, and withdrawals for qualified medical expenses also tax-free. Effectively managing healthcare costs and understanding their tax implications can significantly reduce your taxable income and lower your overall tax liability, providing more financial flexibility in retirement.

The Importance of Tax Diversification

Diversifying your retirement accounts can provide tax flexibility in retirement. It offers a strategic way to manage, and potentially minimize taxes on retirement income. Tax diversification involves spreading your investments across various account types. They could be taxable, tax-deferred, and tax-free—to create flexibility in how you can access funds in a tax-efficient manner. This strategy allows retirees to navigate the tax landscape more effectively. By choosing from different income sources in a way that keeps their taxable income in a lower bracket, they can reduce overall tax liability.

By having a mix of Roth IRAs, traditional retirement accounts, and taxable investment accounts, retirees can decide which accounts to draw from each year based on their current tax situation and future income predictions. This flexibility is crucial for managing taxes in response to changing tax laws and personal circumstances, ultimately leading to a more financially secure retirement.

HOW TAX LAWS IMPACT RETIREMENT PLANNING

How Tax Laws Impact Retirement Planning

Tax laws are continually changing. Staying informed and flexible in your planning is crucial for adapting to new laws and maximizing your retirement savings. These laws can affect how different types of retirement income are taxed.  For instance, alterations in tax rates, adjustments to the rules governing retirement account contributions and distributions, and changes to estate tax exemptions can necessitate adjustments in how individuals save for retirement, when and how they withdraw from their accounts, and how they plan to pass on their assets.

Moreover, tax legislation can introduce new opportunities or challenges for retirees. Recent examples include adjustments to the age for RMDs and changes to the tax treatment of certain income sources. All of which can influence retirement timing decisions and income strategies. Therefore, staying informed about current and proposed tax laws is essential for effective retirement planning. It enables individuals to make proactive adjustments to their financial strategies. Thus, helping to ensure they can maximize their retirement savings’ growth and minimize their tax liabilities, thereby securing a more comfortable and financially stable retirement. Regular consultation with tax professionals and financial advisors can provide valuable guidance in navigating these changes, helping retirees to adapt their plans to benefit from favorable tax treatments or mitigate the impact of less favorable ones.

 

FAQs on Navigating Taxes in Retirement

 

How can I minimize taxes on my retirement income?

Minimizing taxes on retirement income involves several strategies, such as understanding the tax implications of various income sources, making strategic withdrawals from retirement accounts, and considering Roth conversions. It’s essential to balance withdrawals from taxable, tax-deferred, and tax-free accounts to manage your tax bracket effectively. Additionally, timing your Social Security benefits can also impact your tax situation. The same goes for managing investment income to take advantage of lower tax rates on long-term capital gains.

How can I reduce the taxes on my Social Security benefits?

To reduce taxes on Social Security benefits, you can manage your combined income. This includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Keeping this combined income below certain thresholds will reduce or eliminate taxes on your benefits. Strategies include delaying Social Security benefits while withdrawing from tax-deferred accounts earlier, investing in Roth IRAs for tax-free income, and being mindful of how much and when you withdraw from taxable accounts.

What is the most tax-efficient way to handle my investment income?

The most tax-efficient way to handle investment income is to take advantage of tax-favorable investments and strategies. Holding investments for more than a year before selling can qualify you for long-term capital gains tax rates. Thiese are ower than ordinary income tax rates. Consider investing in tax-exempt bonds or funds, particularly if you are in a high tax bracket. Utilizing tax-loss harvesting can also offset any capital gains you might have, further reducing your tax liability.

How do Required Minimum Distributions (RMDs) affect my taxes?

RMDs from tax-deferred retirement accounts such as traditional IRAs and 401(k)s must start at a certain age and are taxable as ordinary income. These mandatory withdrawals can push you into a higher tax bracket, increasing your tax liability. Planning for RMDs involves considering strategies like starting withdrawals earlier to spread out the tax impact, converting to Roth accounts where RMDs are not required, or using RMDs for charitable contributions (Qualified Charitable Distributions) which can exclude the amount donated from taxable income.

What should I consider for tax planning if I’m moving to another state?

When moving to another state for retirement, consider the overall tax environment of the new state. This includes:

  • Income tax rates
  • Exemptions for retirement income
  • Sales tax
  • Property tax rates
  • Any other local taxes.

Some states do not tax Social Security benefits or offer significant deductions on retirement income, making them more favorable for retirees. Additionally, evaluate the cost of living, healthcare facilities, and quality of life, as these factors also play a critical role in retirement planning.

How can I deduct healthcare expenses in retirement?

You can deduct healthcare expenses in retirement if you itemize deductions on your tax return and your medical expenses exceed a certain percentage of your adjusted gross income (AGI). This includes a wide range of out-of-pocket expenses. This includes:

  • Premiums for Medicare and long-term care insurance
  • Prescription drugs
  • Costs associated with medical and dental care.

Using a Health Savings Account (HSA) for qualifying medical expenses can also provide tax-free money for healthcare costs, provided you have an HSA-compatible health plan before enrolling in Medicare.

 

Conclusion: Mastering Taxes for Retirement

Proactive tax planning is essential for securing your financial future in retirement. It requires a blend of knowledge, strategy, and the right support to navigate the complexities of tax planning. By taking control of your tax situation today, you’re not just helping to ensure a more prosperous retirement for yourself but also laying the groundwork for a lasting financial legacy. With the right approach and resources, you can minimize your tax liabilities, maximize your retirement income, and enjoy the peace of mind that comes with financial security.

However, mastering taxes doesn’t mean going at it alone. Leveraging the expertise of CERTIFIED FINANCIAL PLANNER™ and tax professionals can provide you the guidance and insight needed to navigate complex tax issues. These resources can help tailor a tax strategy that fits your unique situation, taking into account your income needs, tax bracket, and long-term financial goals.

 

Next Steps

Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals. This initial consultation is an excellent opportunity to ask questions, address concerns, and get a sense of how we can help you achieve your retirement goals. Don’t miss out on this chance to lay a solid foundation for a secure and prosperous retirement. Take the next step today and schedule your free consultation call —it could be the most important call you make for your retirement future.

 

CFP Colorado Springs

10 ACTIONABLE WAYS TO CUT TAXES NOW AND IN THE FUTURE

Posted on by Brian Colvert

HOW TO CUT TAXES NOW AND IN THE FUTURE

 

If you just wrote a big check to the IRS, you may be wondering how you can prepare now to cut your taxes next April. We’ve got you covered. Luckily, there are several legal ways to reduce the amount of tax you pay each year that don’t just include adjusting your withholding.  Here are 10, practical and actionable, ways to help you cut your next tax bill and those in the future.

1. UTILIZE YOUR RMD FOR YOUR CHARITABLE GIVING

If you are 73 or older, donating your Required Minim Distribution (RMD) to a qualified charity is a great way to reduce your tax burden. These donations are considered a qualified charitable distribution (QCD) and will not be taxed up to $100,000 per account owner.

A qualified charitable distribution can satisfy all or part of the amount of your RMD from your IRA. For example, if your required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.

The more you donate in this way, the more you can exclude and cut from your taxable income This is extremely helpful since RMDs are ordinary taxable income that will often push retirees into a higher tax bracket. 

Qualified charitable donations are a great way to use up your RMD if you are planning to give to charity. However, keep in mind that it must be a check sent directly from an IRA to the charity.

Schwab allows you to have a checkbook on your IRA that allows you to write such checks directly from your IRA. Be aware, that all donations need to be sent/cashed by 12/31 of the tax filing year. 

QCDs can offer big tax savings, as tax rates on regular income are usually the highest. Regardless of the tax benefits, designating this income for charity is a great way to begin or expand your giving and support the causes you care most about. 

2. TAKE ADVANTAGE OF TAX LOST HARVESTING

There is always a silver lining, right? For market downturns, that silver lining is tax-loss harvesting. With tax-loss harvesting, you can use your loss to cut your tax liability and better position your portfolio going forward.

Here is how it works, in its simplest form:

  • First, sell an investment that is losing money and underperforming. 
  • Next, use that loss to reduce your taxable capital gains. This can potentially offset up to $3,000 of your ordinary income for the tax year. (Any amount over $3,000 can be carried forward to future tax years to offset income down the road).
  • Last, reinvest the money from the sale into a different investment that better meets your investment needs and asset-allocation strategy.

This allows you to free up cash for new investments and mitigate a tax consequence.  

As with anything tax-related, there are limitations. Please note that tax loss harvesting isn’t useful in retirement accounts because you can’t deduct the losses in a tax-deferred account. Additionally,  there are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain. Then, a short-term loss would be applied to a short-term gain. You also must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.

The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. We always recommend talking to a professional about your specific situation. 

3.  FUND HSA OR FSA 

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow pre-tax dollars to be set aside for medical, vision, and dental expenses, thus reducing your overall taxable income. Each has its own benefits.

An HSA is triple tax-advantaged, which means:

  • Contributions are made with pre-tax dollars 
  • It grows tax-free (you can invest your contributions and earn interest) 
  • Can be used tax-free for eligible expenses (

Another great thing about an HSA is that you can keep it forever. Funds roll over and never expire. On the other hand, an FSA is a “use or lose it” type of account. However, an FSA is still a good option because it is funded before tax and comes out tax-free. FSA are employer-sponsored so there is often less involved with enrolling and setting up the plan. As such self-employed filers are ineligible to open able to open an FSA. 

Both HSAs and FSAs are good options to help cut and reduce your taxable income.  

CONTRIBUTE TO A PRE-TAX RETIREMENT ACCOUNT TO CUT TAXES NOW

Contributing to a retirement plan may be one of the simplest ways to slash what you own to the IRS. Whether a 401k or an IRA, (learn the differences here), both offer tax savings.

4. MAX OUT  YOUR 401K

If your employer offers a 401(k), maximizing your contributions is an excellent way to save for retirement while reducing your tax burden. To realize benefits on your next tax bill, contribute to a Traditional 401k rather than a Roth 401k.

A Traditional 401(k) allows you to contribute pre-tax dollars, which lowers your taxable income and can significantly decrease your overall tax liability. This type of account provides immediate tax savings, making it a strong choice if your goal is to minimize your current tax bill. While Roth 401(k) contributions grow tax-free, they are made with after-tax dollars and don’t offer the same upfront benefits. Additionally, contributing enough to receive any employer match ensures you’re fully leveraging this valuable opportunity to grow your retirement savings.

5. CONTRIBUTE TO A TRADITIONAL IRA

Additionally, if you are below the income limits, you can also contribute to a Traditional IRA. They are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. Contributions to a Traditional IRA are often tax-deductible. However, if you do have a 401k or any other employer-sponsored plan, your income will determine how much of your contribution you can deduct.

6. CONSIDER A CASH BALANCE PLAN

If you are a business owner or solopreneur and have a high income, consider a cash balance plan. A Cash Balance plan is a type of retirement plan that allows for a large amount of money to go in tax-deferred and grows tax-deferred. It is a great option for owners looking for larger tax deductions and accelerated retirement savings.

Cash Balance contributions are age-dependent. The older the participant is,  the higher the contribution can be. It can be an extra $60k to over $300k (based on age and income ) on top of combined 401k/ profit-sharing contributions. 

An attractive feature of a cash balance plan is that the company offering the benefit can take an above-the-line tax deduction on contributions. Above-the-line deductions are great for tax savings because they reduce income dollar for dollar.

CONTRIBUTE TO AN AFTER-TAX RETIREMENT ACCOUNT TO CUT TAXES IN THE FUTURE

While a 401k, Traditional IRA, and Cash Balance Plan can help curb taxes in the near term, we also recommend planning for future tax implications to help you cut your tax bill for years to come. Roth IRAs are retirement accounts that are made up of your AFTER-tax contributions. However, they offer tax-free growth and tax-free withdrawals. 

7. GROW TAX-FREE WITH A ROTH IRA 

Again, Roth IRA contributions are after-tax, so you can not deduct your contributions. Nevertheless, your distribution will be tax-free and penalty-free at age 59 ½  Something your future self will thank you for! Another benefit is that a Roth IRA isn’t subject to RMD requirements either. 

Your Roth IRA contribution limits are based on your filing status and income.

There are definitely some potential tax savings here, especially for those just starting out. It makes sense to pay taxes on the money you contribute now, rather than later, when your tax rate may be higher.

8. CONSIDER A  BACKDOOR ROTH

A Backdoor Roth allows people with high incomes to fund a Roth, despite IRS income limits, and reap its tax benefits. Could it be right for you?

In short, you open a traditional IRA, make non-deductible (taxable) contributions to it, then move that Traditional IRA into a Roth IRA and enjoy the tax-free growth. 

It is important to note that you can not have any money currently in an IRA, SIMPLE IRA, or SEP-IRA to make this work properly.  There are more complexities involved in setting this up, and we recommend talking with a CERTIFIED FINANCIAL PLANNER™.

9. ROTH CONVERSION

A Roth Conversion involves the transfer of existing retirement assets from a traditional, SEP, or SIMPLE IRA, or from a defined-contribution plan such as a 401k, into a Roth IRA.

You’ll have to pay income tax on the money you convert now (at your current tax rate), but you’ll be able to take tax-free withdrawals from the Roth account in the years to come

You can also use market downturns as an opportunity to do a Roth Conversion. If your IRA goes down in value because of market fluctuations, you could convert the account to a Roth. This will allow you to pay a smaller amount of taxes because the account is down in value. Then you’ll have the money in a Roth when the market recovers, which would then be tax-free.

While there is no predicting what the tax brackets and tax rates will be in the future, if taxes go up by the time you retire, converting a traditional IRA and taking the tax hit now rather than later could make sense in the long run.

10. PAY ATTENTION TO THE CALENDAR

Lastly, from a tax perspective, there is a big difference between December 31 and January 1st. While some things, such as IRA contributions can be made up until the filing deadline, many must be done during the tax year, like qualified charitable distribution.

It is important to plan as far in advance as possible to help minimize your taxes. We recommend meeting with a tax professional and your financial advisor throughout the year.

>> Check here for the most current contribution limits, dates, deadlines and more! <<

The key to lowering your tax bill is to plan ahead and cut your tax liability in a way that makes sense for you.  It’s impossible to know what regulations, changes, and updates will go into effect during any given tax season, but rest assured that we’ll be here to help you plan. Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals today! 

Until then, take these tips to heart and remember that reducing your taxes isn’t an impossible task.

HOW TO PREPARE FOR BIDEN’S NEW TAX LAWS

Posted on by Brian Colvert

President Joe Biden hasn’t hidden his desire to raise taxes on corporations and the wealthy. It is his way to fund a multi-trillion infrastructure package and new social programs. Details are likely to change as the legislation makes its way through Congress, yet many are already wondering how to prepare for Biden’s new tax laws. 

While history reveals that the stock market does well during periods of higher taxes (as higher taxes often come with stronger economic growth), it doesn’t mean you should sit idly by and not do anything with your money amidst increased taxation. In fact, higher taxes will require an investor to be more adaptive and diligent.

 

Here are some ways you can prepare for Biden’s new tax laws:

 

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Long-Term Capital Gains and Qualified Dividends

Proposed change: 

The proposed Biden tax plan includes nearly doubling the long-term capital gains (gains on assets held for over a year) for those making more than $1 million. This is up from a 20% maximum rate (plus 3.8% net investment income tax) to 39.6% (plus 3.8% net investment income tax). This results in a top marginal rate of 43.4 percent. 

How to prepare: 

We are firm believers that long-term goals, not taxes, should be the primary driver of decisions. However, preparing for Biden’s new tax laws surrounding capital gains could compel some high-income investors to consider selling off assets before the tax hike takes effect. Others will look into alternative strategies to lower their taxes.

Gauging the impact of capital gains requires careful analysis. It is important to look at projections of future income and tax brackets. Capital gains taxes, unlike income taxes, are discretionary. This means that investors have greater flexibility on when to sell their investments. As such can determine how much tax they will have to pay in a specific tax year.  For example, there may be years in the future when someone’s income falls below the proposed $1 million threshold, resulting in a lower rate.

As a rule of thumb, realize capital gains when necessary to fund goals and manage risk. Consider realizing capital gains at today’s low rates (pre-Biden’s changes) if needed to fund shorter-term goals. For longer-term goals, investors may choose to retain the investments in the event future tax reform lowers the capital gains tax rate.

Also, consider utilizing an asset location strategy by placing inefficient tax assets in tax-deferred or nontaxable accounts. Interest income, dividend income, and realized capital gains do not get taxed in IRAs. We also recommend considering installment sales to regulate annual income levels, keeping income under $1 million as much as possible.

Basis Step-Up at Death

“In this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin

Proposed change: 

Biden’s new tax plan is proposing to end the longstanding tax exemption for investment appreciation when a taxpayer dies. This tax break is the step-up in basis. Changing it could raise taxes at death significantly for top-earning Americans.

Currently, if you inherit an asset that increased in value when the person who died owned it, the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. This adjustment is called a “step-up” basis. The increase in basis also means that the person who inherits the property can sell it immediately without paying any capital gains tax because there is technically no gain at that point to tax.

The current step-up saves taxpayers more than $40 billion a year, according to the congressional Joint Committee on Taxation. The new proposal would take back some of that to help pay for social programs. It would be a profound change to a provision that has been in the tax code for 100 years.

Under the proposal, the un-taxed gains on investments held at death, such as stocks, land, or a home, would likely be taxed at a top rate of 39.6%, above an exemption of $1 million per individual, plus $250,000 more for a primary home. For married couples, the total exemption would be doubled, to up to $2.5 million of gains.

How to prepare: 

Potential strategies that could help with this rule change include the use of flexible grantor trusts, which allow swapping assets, borrowing, loaning;  Irrevocable trusts which permit gifting to charity to avoid a deemed sale and capital gains); consider prioritizing low-basis assets for charitable giving. If this proposal goes into effect, we suggest discussing options with your advisor and tax professionals.

Estate and Gift Tax Changes

Proposed change: 

Under Biden’s new tax laws he is proposing to reduce the estate and gift tax exemption amount to $3.5 million. Maybe lower. The current exemption amount is $11.7 million. A reduction in this amount will result in more tax for many families at death. For example, an estate of $5 million (currently under the $11.7 million limit) would be taxable for amounts over $3.5 million.

How to prepare: 

Consider using and funding a GRAT (grantor retained annuity trust) to transfer excess growth of appreciating assets while minimizing gift and estate taxes. Today’s GRAT rates are historically low, so this is an ideal time to create a GRAT. Consider funding trusts now.  Particularly those that are expected to need cash to meet future expenses, such as life insurance premiums, in case annual exclusions are capped. We recommend discussing such strategies with your lawyer and/or CPA. 

Further, you can still implement annual gifting. Current limits allow for gifts up to $15,000 per donee per year. A solid strategy used to pass wealth while staying within IRS limits. A  married donee may gift $15,000 to a spouse, as well. 

Individual Income Tax

Proposed change: 

Biden is also proposing to increase the top individual ordinary income tax rate to 39.6% for families making more than $400,000 ($200,000 for individuals). The current tax law is 37% top individual ordinary income tax rate. The proposed income tax increase is relatively small.  It would return it to 2013-2017 levels, however, there are still some tax mitigation opportunities. 

How to prepare: 

First, make sure you are fully funding your 401k and IRAs, further convert traditional IRAs into a Roth IRA, i.e. a Backdoor Roth. Revisit elections on deferred compensation plans. 

Other Proposed Tax Laws

Biden’s proposed new tax laws include much more than listed here. These are the biggest changes, to read more about all the proposed changes reference The American Jobs Plan and The American Family Plan.

Although definitive tax policy changes have not yet been enacted, it is highly likely we will see changes to the tax landscape late in 2021 or early 2022. Biden’s new tax laws could have a significant impact on your finances and taxes, with specific changes on investment income. Bonfire Financial can help you create a financial plan and optimize your tax strategy based on your needs and goals.

If you have questions on how to prepare for Biden’s new tax laws or are interested in scheduling a financial planning audit, please reach out to our CFP® professionals at 719-394-3900.

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