Strategies to Reduce Taxation of Retirement Withdrawals and Appreciated Assets
Tax reduction can be a powerful investment strategy. Let’s review some strategies that taxpayers might use to get more out of their hard-earned savings.
Passing IRAs to heirs in the form of inherited IRAs might allow for lower income taxation if the heir withdraws the money at a lower income tax rate. Note that heirs can often elect to receive the IRA distributions over their remaining life rather than all at once – allowing years of deferred taxation on the balances.
Donation of up to $100,000 of IRAs directly to charity each year has been allowed in recent years for taxpayers 70.5 years old or older. Note that a major problem with donating IRAs prior to age 70.5 (or cashing them in and donating the cash to charity) is that the income recognized will not typically be fully offset by deductions to charitable contributions due to the increasing tax provisions that dilute the value of deductions.
A dollar of appreciated assets is worth less than $1 due to the income taxes on their sale. But reducing the effect of their taxation is usually a little easier than reducing the taxation of retirement assets. One way to avoid the income tax on appreciated assets is to pass the assets through one’s estate (causing the cost basis to step up). Investors can borrow against appreciated assets in the meantime to meet cash needs.
Charitable contributions of long-term appreciated assets make a lot more sense than contributions of cash. An investor donating an appreciated security can generate tax deductions for the full market value while avoiding recognition and taxation of the accrued profit.
Biltmore Capital Advisors is NOT an accounting firm. For specific advice regarding taxes, please consult your tax advisor.