If you're like most people, you've invested in a crazy quilt of assets ranging from stocks and bonds to real estate to precious metals. Amid this dizzying variety, the prevailing tax rules can provide further complications, especially after you've retired. One overarching rule is that you must begin taking "required minimum distributions" from retirement plans such as 401(k)s and traditional IRAs after age 70½. Because these distributions are generally taxed at ordinary income rates, you could be facing a higher tax bill at just the wrong time. But there are ways to ease the pain. Consider these four strategies for reducing the tax bite in years when you have to take RMDs.
1. Harvest capital gains. When you sell securities and other capital assets, your profits are taxed under special rules for capital gains. The maximum tax rate on long-term gains (on sales of assets you've held longer than a year) is 15%, or 20% if you're in the top tax bracket for ordinary income. That lower rate is a benefit in itself. But another aspect of the law could help even more. Capital gains—including short-term gains, which are taxed as ordinary income—are offset by capital losses, and if you've taken any losses earlier in the year, you might take profits now on short-term holdings, knowing they'll be absorbed by the losses. It's usually better to use losses to offset short-term rather than long-term gains because of the higher tax rate for short-term gains. 2. Harvest capital losses. With a capital loss, you can offset capital gains plus up to $3,000 of ordinary income. If that still doesn't use all of your losses, you can carry over the excess to the following year. Typically, investors look to harvest losses at year-end when they've already realized capital gains in prior months. 3. Smooth out income. Although you often can't control when taxable income comes in, you may be able to time some items to your tax benefit. When possible, consider taking just enough income—some of which may come from selling investments—to "fill up" income to the top of your current tax bracket, trying to stay below the thresholds of a higher bracket. 4. Rely on tax deferral. Tax-deferral strategies may help you to reduce your income, and your taxes, for a year or more. For example, if you sell real estate on the installment basis, only part of your gain will be realized in the year of the sale. Or you might simply wait until after the first of the year to sell securities at a gain. |