2019 Year-End Tax Planning for Retirees

By JoAnn Huber

November 15, 2019

2019 Year-End Tax Planning for Retirees

Year-end tax planning is the perfect opportunity to review your tax situation for the year. This task allows you to identify opportunities that may be available to you to lower taxes over your lifetime. Many people take the short-term perspective, thinking they want to pay the least amount of tax possible this year. They fail to consider the long-term perspective of taxes. This short-term perspective may cause them to pay more taxes over their lifetime. There are steps that you should take now to ensure you do not miss out on any year-end tax planning opportunities.

Year-End Tax Planning Tip #1: Take Your Required Minimum Distribution

If you are over the age of 70 ½ and have money saved in a qualified retirement plan such as 401(k), 403(b), Roth 401(k), traditional IRA, etc. then you must take a required minimum distribution (RMD). Usually, the RMD has to be taken by December 31st. There is an exception to this, in the year you turn 70 ½. For this year only, you can take the distribution by the following April 1st. This presents a tax planning opportunity. Should you take the distribution before the end of the year or take two distributions the next year? You can find the answer to this question by completing a tax projection to see how it impacts you.

If you have more than one IRA, you can aggregate the RMDs and take from only one IRA. You still have the option to take the RMD from each individual IRA. Inherited IRAs are not included in this aggregation. Different aggregation rules apply if you have inherited multiple IRAs. By being strategic with the account(s) used to take your distribution, you can rebalance your portfolio to your desired investment mix.

Aggregation is not allowed for employer retirement plans. If you have multiple employer retirement plans, the RMDs must be taken from each individual plan.

Year-End Tax Planning Tip #2: Qualified Charitable Distributions Help Satisfy Your Required Minimum Distribution

Before you take your RMD, it is vital to make sure you are not overlooking other tax options to satisfy the RMD, such as qualified charitable distributions. A qualified charitable distribution (QCD) allows you to use a portion or all of your RMD up to $100,000 to make a charitable donation.

When many taxpayers filed their tax returns earlier this year, they found it is no longer advantageous to itemize due to the higher standard deduction. A QCD allows a taxpayer to still get a tax benefit from their charitable donation even if they do not itemize deductions. Only taxpayers who are age 70 ½ or over are allowed to make a QCD.

QCD Rules

A QCD has some rules that must be followed. The IRA custodian sends the funds directly to the charity on your behalf. You are still required to substantiate the charitable donation via a receipt from the charitable organization. However, the way it is reported on your tax return is different than other charitable donations.

The QCD amount is not reported as a charitable deduction on Schedule A. Rather, the amount of the QCD is deducted from the amount of income you include in taxable IRA distributions on the tax return. The Form 1099-R that you receive from the IRA custodian will show the distribution as a normal distribution. It is up to you to report the QCD on your tax return or tell your CPA that you made a QCD.

Let’s look at an example of how a QCD benefits a taxpayer. Assuming we have a married couple that is in the 22% tax bracket. Before the Tax Cuts and Jobs Act became law, they itemized their deductions. Now with the higher standard deduction, they are no longer itemizing, so they are not receiving any benefit from their annual charitable giving of $15,000. By using a QCD to donate $15,000, they reduce their taxable income by $15,000, saving them $3,300 in federal tax.

Year-End Tax Planning Tip #3: Other Charitable Giving Tax Planning Strategies

There are many ways to be tax efficient when making charitable donations. For those who are charitably inclined and want to reduce their taxes but are ineligible to do a QCD, there are other charitable giving options to consider.


One tax planning strategy you may consider is bunching your charitable donations. Typically, if you are bunching your charitable donations, then you would either defer your charitable giving until next year or accelerate next year’s giving to the current year. This results in a more substantial charitable donation in a single tax year. This tax planning strategy is most effective if you itemize one year and take the standard deduction the other year.

Donor-Advised Funds

Another charitable giving strategy is a donor-advised fund. A donor-advised fund enables you to take a large charitable deduction in the year the money is transferred into the fund but spread out the transfer of money to the charities over a period of years. Many people do not want to give a large amount to charity as a lump-sum. The donor-advised fund allows you to get the tax benefit of a large charitable donation in one year while maintaining control of the timing of the distributions to the charities.

Appreciated Securities

If you have securities that have gains, you may want to consider donating these to charities. The tax benefit here is getting a charitable deduction for the fair market value of the securities, but you don’t have to include the amount of the gain in your taxable income. If you have shares that have lost value, don’t donate these. Rather sell the securities to realize the capital loss and then give the proceeds to get the charitable donation.

Year-End Tax Planning Tip #4: Capital Gains Distributions

Capital gains distributions can result in phantom income. This unexpected income is taxable. If you own mutual funds in a taxable account, then you need to be aware of the amount of capital gains distributions that the fund company is going to distribute. Otherwise, you may end up paying taxes even if you lost money on the fund throughout the year.

Here’s an Example

Mutual fund companies have a requirement to distribute 95% of their income. If the fund manager sells shares of stock at a gain, the fund must distribute at least 95% of this gain to the shareholders. For example, if a mutual fund manager bought 10,000 shares of Apple stock years ago for $100 per share and sold those shares this year for $250 per share, then the mutual fund has a gain of $1.5 million. Fund managers must distribute at least 95% of this gain to shareholders who are then must include this gain in their income. It doesn’t matter if you purchased shares in the mutual fund years ago or days ago, you still have to include your proportion of the gain in your income.

You may think that selling the fund to avoid the gain is the tax-smart move to make. In some instances, it may be beneficial to sell before the distribution of the capital gains. However, you need to be careful as you may be trading one taxable event for another. If the mutual fund has appreciated during the time you owned the fund, then you will realize a gain on the sale of the mutual fund shares. This realized gain may result in more income than would have been realized from the capital gains distribution.

You also need to be careful if you are buying into a mutual fund at the end of the year, as you may buy into a large capital gains distribution. Make sure to check whether or not the fund anticipates making a capital gains distribution before buying. It may benefit you to wait until after the record date for the distribution before buying into the mutual fund.

Year-End Tax Planning Tip #5: Capital Gain Harvesting or Capital Loss Harvesting

Year-end tax planning also involves looking at your investment portfolio to see what tax opportunities exist to save taxes. You should focus on the investments that are outside of your retirement accounts. One important caveat is that you need to be careful not to “let the tax tail wag the dog.” You need to make smart, long-term investment decisions rather than focus solely on taxes, as this can lead to bad decisions. When deciding whether to harvest capital gains or losses, you need to see how it impacts your overall investment portfolio as well as the impact on your taxes.

Even though you don’t want taxes to drive your investment decisions, it is important not to ignore them. Long-term capital gains and qualified dividends are taxed at preferential rates to ordinary income. The three rates that apply to long-term capital gains and qualified dividends are 0%, 15%, and 20%. These rates have individual brackets.

Capital Gains Tax Rates

Capital Gains Rates for 2019 Source:

Short-term capital gains are taxed at ordinary income tax rates, which can be as high as 37%. The short-term rates apply to the sale of any asset not owned for at least a year. To avoid paying the higher ordinary income tax rates, you need to be strategic in selecting which assets you sell and when you sell them.

A tax planning opportunity exists in both harvesting gains and harvesting losses, depending on your tax situation. You should consider capital gain harvesting if you expect your long-term capital gains to be in the 0% tax bracket. Capital gain harvesting means intentionally selling securities to recognize long-term capital gains. This allows you to save taxes that may be due later when you are no longer in the 0% capital gains bracket. It also allows you to rebalance your portfolio with no tax impact.

In other situations, such as when you are in a higher tax bracket, capital loss harvesting may be a strategic tax move. Capital loss harvesting is when you intentionally sell securities at a loss. These capital losses can offset an equivalent amount of capital gains. If you have more losses than capital gains, then losses of up to $3,000 can be deducted from your ordinary income.

Year-End Tax Planning Tip #6: Roth Conversions

A Roth conversion is when you transfer money from a traditional tax-deferred account to a Roth IRA. The decision of whether or not to do a Roth conversion and the amount to convert is complex. It is important to remember that a Roth conversion is a taxable event, so planning is crucial to make sure you don’t create an event where you have a large tax bill and pay more tax than necessary.

There are three main benefits to Roth IRAs.

  1. A qualified distribution from a Roth IRA provides tax-free income.
  2. There is no required minimum distribution from a Roth IRA.
  3. The growth in the Roth IRA is tax-free.

The Roth IRA provides tax diversification during retirement, allowing you to better control the amount of tax you pay.

Some taxpayers were unable to contribute to a Roth IRA during their working years due to income limits on contributions but still want to get money into the Roth to take advantage of the benefits listed above. A Roth conversion provides this opportunity. A Roth conversion can be an important element in year-end tax planning as it allows you to choose when you pay the tax on your retirement savings. One factor you should consider before completing a Roth conversion is what your tax bracket is this year in comparison to what you think your tax bracket will be in the future. Roth conversions are best for people who believe they will be in a higher tax bracket in the future.

Year-End Tax Planning Tip #7: Listen to America’s Wealth Management Show

Dean Barber, Bud Kasper, and CFP® and CPA JoAnn Huber, discuss tax planning and give examples of how forward-looking tax planning can impact an overall retirement plan. So give the America’s Wealth Management Show episode Year-End Tax Planning a listen below, you’ll likely find it helpful.

If you liked that episode of America’s Wealth Management Show, don’t miss Dean and JoAnn’s episodes of our podcast The Guided Retirement Show. They’re all about 401(k)s, IRAs, and Traditional versus Roth. You can find episode one here, and episode two here.

Tax Planning for Next Year

Year-end is the perfect time to look at your income needs for next year. Now is the time to develop a tax strategy around which accounts to use to provide the cash you will need. By planning ahead, you can develop a tax-smart withdrawal strategy which is especially important when you retire. To maximize the long-term tax savings, this should be part of a multi-year tax strategy. Please contact us if you would like help developing your long-term tax plan so you don’t pay any more tax than legally required. You can do so by filling out the form below or giving us a call at 913-393-1000.

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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.