5 Tips for Tax-Efficient Retirement Withdrawals

Retirement is supposed to be a time of relaxation—a reward for the decades of work you performed. But life happens, and sometimes you may need to withdraw more money from your accounts than you had expected. Inefficient withdrawals can lead to you owing more money in taxes than you anticipated — money that is hard to offset when you are no longer working and earning an income. The following is a list of tips that will leave you better informed on how to make tax-efficient withdrawals in your retirement. 

5 Important Tips: 

  1. Like-Kind Exchanges
  2. Tax Write-Offs
  3. Make Money from Your Hobbies
  4. Pay Attention to Your Long-Term Investments 
  5. Tax-Loss Harvesting for Capital Losses

1. Like-kind Exchanges

A like-kind exchange is an exchange process in which you can sell one asset and replace it with a similar asset, which allows your purchase of this new asset to not be deemed a taxable event. For example, you may have a piece of real estate that no longer fits its purpose. Through a like-kind exchange, you could sell it and acquire another piece of real estate without the sale of the property falling under capital gains tax liability. Generally, any real estate that isn’t used for personal residence is eligible for a like-kind exchange. 

However, you must follow the rules set in place for like-kind exchanges, otherwise, you will create a taxable event for yourself. Part of the exchange process requires you to ensure all your paperwork and filing are in place before the exchange. 

A like-kind exchange is a great way to defer capital gains taxation until the time you sell the property you gained in the exchange. This second property can later be used for a like-kind exchange as needed.  

2. Tax Write-Offs

Tax write-offs are an important part of tax-efficient investing. A few years ago, tax laws were changed, and this impacted itemized deductions and raised the standard deduction. Standard deductions are now so high that tax preparers are often unable to write off things like donations given to people’s favorite charities and churches. 

There are ways to work around these changes. For example, you can make your charitable contributions from money earned in a Roth IRA (Individual Retirement Account). Making donations from your Roth IRA, or another similar account, allows you to withdraw tax-free money to donate to a good cause while taking advantage of allowable tax deductions. 

Another option: since certain expenses can no longer be written off in your personal tax preparations, business owners are now using business tax deductions they may not have used in the past. These tax deductions are legitimate, but business owners may have been unaware of them or may not have needed to use them previously. Business owners can consider employing the services of a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) to help them discover if there are business deductions they aren’t taking advantage of.  

3. Make Money from Your Hobbies 

It is incredibly efficient to receive a reduction in tax obligations from activities you not only love doing but are hobbies you would be doing whether you earned money from them or not. Elijah Heath, a CFP® professional with Heath Wealth Management, shares a story about a client, a former surgeon, who loved to sell antiques. While the client only considered it a hobby initially, he was so successful that he turned it into a legitimate business. Over time, he even incorporated his business. Because of proper organization, there were many parts of his hobby-turned-business that this client has been able to write off on his taxes every year. If you have a passion that you could turn into a small – or larger – business for the purpose of earning additional income and taking advantage of tax benefits, speak to a financial and tax advisor about this option. 

After 2018, hobby expenses were no longer eligible for itemized tax deductions. Another client of Elijah Heath had a hobby of buying and repairing old cars, then reselling them for a profit. Once those new tax rules were put in place, it became impossible for this client to write off expenses associated with buying the cars and the parts needed to repair them. In this scenario, the client was taxed on the full amount the vehicle sold for without any consideration for the tens of thousands of dollars spent restoring the car. This hobby tax requirement is scheduled to disappear in 2026, but it is important to keep this new policy in mind. A trusted advisor could show you how to turn such activity into a legitimate business to protect your income and decrease your tax liabilities. 

4. Pay Attention to Your Long-Term Investments

Long-term capital gains are profits made from selling an asset for more than you bought it for after more than a year of ownership. Congress is currently discussing making changes to long-term capital gains making them unavailable to taxpayers in the near future.  

With a somewhat increasingly turbulent stock market and the possibility of higher tax rates on capital gains, it can be very tempting to sell off your assets at the first chance you have to produce a gain. However, selling assets without paying attention to how long you have held them can lead you to pay more taxes on those gains. 

For most people, the tax rates of long-term capital gains are much lower than their normal income tax rates. There is a requirement that you must hold an investment for more than a year to get lower tax rates. If you sell an asset before you have held it for a year, this gain becomes a short-term capital gain which is not eligible for the reduced tax rates that long-term capital gains enjoy. Some people make the mistake of selling their assets off before the one-year date, unintentionally increasing the amount of their tax liability. Even selling an asset one day early can have a major impact on the amount of money you will be required to pay in taxes. 

Working with Life’s Up’s and Downs 

No matter how well we plan, sometimes unforeseen problems come our way—problems that sometimes require extra money to fix. Some years you may spend more money than you expected on fixing a leaky plumbing system in your house or spent it on an expensive vacation for your family. In the years you spend less money than you had expected, talk to your financial advisors about adding more to your investment accounts. In the years when your income tax bracket is lower, you can also consider investing more money to help build your financial safety net for future needs that can include medical or health care costs, home repairs, vehicle repairs or replacements, weddings, college expenses, and more.  

5. Tax-Loss Harvesting for Capital Losses

If you intend to sell an asset at a loss, your financial advisor can advise you on how to do this to offset your gains. A great way to avoid the tax liabilities that come with a declining investment is a strategy known as tax-loss harvesting. You or your financial planner may consider selling investments to wait out loss rules for 31 days. You should put your assets somewhere safe for that 31-day period and then buy the investment back. This helps with current and future gains.

Tax-loss harvesting allows you to sell a declining investment so you can replace it with a similar, but more promising, investment. You can then write off your losses from that initial investment, providing you with some safety from any of the tax penalties you would have otherwise incurred. Usually, tax-loss harvesting is done at the end of the tax year, but it is important to keep an eye on the market for other key times. For example, in March 2021, the market took a downturn which resulted in a lot of early tax-loss harvesting. Knowing when to utilize tax-loss harvesting requires vigilance, but a CFP® professional can offset some of this work for you. 

You may also want to consider NII (Net Investment Income) tax. NII taxes are applied to income earned through investments like stocks, bonds, loans, and mutual funds. You can reduce your NII tax liability through methods like tax-loss harvesting, investments in retirement plans, or charitable donations. Strategic withdrawals and investments can keep your investment income below certain thresholds, meaning you may be able to avoid paying the NII tax completely.

We’re Here to Help You 

Elijah Heath, a CERTIFIED FINANCIAL PLANNER™ professional, is a fiduciary with an ethical obligation to provide information, products, and services in your best interest, not what earns him the best fee or commission. Heath Wealth Management wants to be your advisor for life so you, your children, and grandchildren all benefit from the relationship.

Call us to learn more, ask questions about your specific circumstances, and determine if we are the right fit for you. Our phone number is 813-556-7171. We can also be reached by email at Elijah.Heath@LPL.com.

Heath Wealth Management and LPL Financial do not provide tax or legal advice or services.  This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.