Our own Chris Johnson recently presented a “Taxes in Retirement” seminar at the Middleton Library. We thought sharing a few of the common questions would be helpful.
How do I decide whether to save to my traditional or Roth 401k?
It depends! Our tax system is progressive, meaning the last dollar you earn in the year will likely have a higher tax rate than the first.
Generally, you want to pay taxes now when you’re in a low tax bracket and pay taxes later when you’re in a high tax bracket.
That’s how it relates to the type of account. You pay taxes now on Roth contributions while you pay taxes later on traditional 401k contributions.
It typically makes sense to pay taxes today (and make Roth contributions) if you’re in the 12% Federal tax bracket and defer taxes (and make traditional 401 contributions) when you’re in the 32% Federal tax bracket or higher. If you’re in the middle (22% or 24% tax bracket), you likely can do a mix of both.
What’s a tax-efficient way to make a charitable contribution?
We think one of the most efficient ways to donate to 501(c)(3) nonprofits is through a QCD (Qualified Charitable Distribution). Here, money can go directly from your IRA (Individual Retirement Account) to the charity and never be taxed. So, a dollar that you earn is a dollar the charity receives.
Many people write checks for donations. You have already paid tax on that, so the $1.43 you earned was taxed at ~30% (example), and then that dollar goes to charity. Not all of the money you earn makes it to the charity!
Other efficient ways to donate include:
- Donating appreciated stock
- Contributing to a Donor Advised Fund
- Doubling up donations into one year (to exceed the standard deduction)
Are there RMD calculators online to help determine what money I need to draw from my accounts?
Yes! Charles Schwab has a Required Minimum Distribution (RMD) calculator online at:
https://www.schwab.com/ira/ira-calculators/rmd
That’s one thing JSA can help with, too, monitoring when a distribution is required.
Why do I have to pay capital gains on my mutual fund even though I didn’t sell any shares?
The portfolio manager of the mutual did sell stocks throughout the year, even though you didn’t. Mutual funds pool the capital gains together and then distribute those to shareholders at the end of each year.
This is one of the reasons JSA prefers to pick individual stocks; we can help improve tax efficiency across your accounts.
We hope you found these insights helpful!
Important Information:
Jacobson & Schmitt Advisors, LLC (“JSA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where JSA and its representatives are properly licensed and or exempt from licensure. The information provided is for educational and informational purposes only and does not constitute investment advice, and it should be be relied upon as such. It should not be considered a solicitation to buy or an offer to sell a security.
