For retirees, tax-saving moves to review before year-end

It begins with your required minimum distribution.

• Retirees and people nearing retirement may still have time to trim long-term tax exposure with actions completed before Dec. 31.

• Roth conversions, required minimum distributions and a temporary deduction for people 65 and older are among the items worth a closer look.

• Tax choices should be considered alongside Social Security, pensions, investments and withdrawals from retirement accounts, according to Gaines Capital Management.

If you are retired or close to retirement, there is still a limited window to make certain tax-planning decisions for the coming year, leading advisers to urge a wider review of how retirement income will be taxed.

Aaron Gaines, a certified financial planner and founder of Atlanta-based Gaines Capital Management, pointed to five areas retirees may want to examine before year-end.

One possible move is a Roth conversion, which shifts money from a tax-deferred retirement account into a Roth account. The converted amount is usually taxed as income in the year of the transfer, but later qualified withdrawals from the Roth account can be tax-free.

For some retirees, years with relatively lower income before required minimum distributions begin can create an opening for partial conversions. Still, the amount and timing require caution because a conversion can raise taxable income and may also affect other income-based costs or taxes.

Required minimum distributions

Retirees should also plan for required minimum distributions, or RMDs. Under current federal rules, withdrawals generally start at age 73 for owners of traditional IRAs and many workplace retirement plans, though the exact deadline can vary based on the account type and employment status. The Internal Revenue Service says most annual RMDs after that must be taken by Dec. 31.

Preparing before those withdrawals become mandatory can give retirees more control over when taxable income is recognized. Once RMDs begin, flexibility may be reduced, especially for people with large balances in tax-deferred accounts.

A temporary federal tax deduction may create another planning opportunity. For the applicable years, taxpayers age 65 or older can claim an additional deduction of up to $6,000 per person. An eligible married couple filing jointly could receive up to $12,000.

The deduction starts to phase out when modified adjusted gross income rises above $75,000 for single filers or $150,000 for joint filers, according to IRS guidance. It is available whether taxpayers take the standard deduction or itemize.

Gaines also advises looking at retirement income as a whole. Social Security benefits, pensions, IRA distributions, investment income and Roth conversions can all interact under federal tax rules, so one decision may change the tax outcome or financial effect of another.

The importance of timing

The final issue is timing. Some strategies meant to shape a taxpayer's position for the coming year must be finished by Dec. 31 and cannot be applied later when a return is prepared.

“Tax preparation tells you what already happened,” Gaines said. “Tax planning asks what we can still do before it happens.”

The right approach will differ from household to household, and moves such as Roth conversions can create an immediate tax bill. Retirees should consider consulting qualified tax and financial professionals before making changes based on their income, accounts and long-term goals.