5 Tax-Saving Hacks Retirees Must Know Before the End of 2023

One of the biggest drags on retirement savings is taxes.

While you always have to pay your fair share of taxes, there are ways you can reduce your tax burden. That can help your retirement savings stretch a lot further, whether you're spending on yourself, gifting money to your children or grandchildren, or donating to your favorite nonprofits. So, knowing how to save on taxes is a big advantage for retirees.

With the end of the year right around the corner, now is a prime opportunity to make some last-minute tax moves. Here are five tax-saving hacks you can use to keep more money in your pocket come April next year.

An adding machine sitting on top of a tax form.

Image source: Getty Images.

1. Tax-loss harvesting

If you have a lot of investments in a taxable brokerage account, you likely have some that didn't perform very well in 2023.

While the S&P 500 has had a great year, up around 19% through the end of November, much of that performance comes from just a handful of stocks. A lot of stocks actually saw their prices decline this year, and if you're holding shares bought before the bear market started in 2022, you might be holding on to some big losses on paper. If you're holding on to bonds you bought just about any time in the last five years, you probably have some paper losses on those as well after the rise in interest rates.

It could be smart to sell some of those investments for a loss. When you realize a capital loss, you can deduct the amount of the loss against any capital gains you've realized that year. If you have more realized losses than gains, you can offset up to $3,000 per year in regular income. That includes retirement account withdrawals.

One thing you must be aware of if you sell your investments for a loss and plan to buy them back is the wash sale rule. The wash sale rule says you have to wait more than 30 days from selling a security for a loss before buying it back. Otherwise, it's as if the sale never happened.

2. Tax-gain harvesting

On the other side of the coin is a strategy of selling investments for a gain and purposefully paying the taxes on them. The trick is qualifying for a 0% tax rate.

Capital gains have a generous 0% tax bracket that's possible to achieve in retirement. Couples with less than $89,250 in total taxable income won't pay any tax on their capital gains in 2023. (Individuals will have to stay below $44,625.)

If you're currently on track to stay below that threshold, you could sell some investments for a gain and permanently increase their cost basis without paying any additional taxes. That will serve to reduce your tax burden in the future. What's more, the wash sale rule doesn't apply to tax-gain harvesting.

One pitfall to avoid, however, is Social Security taxes. Harvesting capital gains might not incur any additional taxes, but it could make more of your Social Security income taxable. If that's the case, you might not come out ahead.

3. Donating appreciated assets

If you're charitably inclined, one of the best ways to donate is by giving appreciated assets like stocks. Most non-profits accept direct donations of stocks.

The benefits for taxes are two-fold. First, just like a cash donation, you receive a deduction for the amount you donated. The amount, in this case, is the value of the asset at the time of the donation.

Not only do you get a deduction, but you also avoid taking capital gains. That means you won't have to pay taxes as if you had sold them and donated the cash proceeds.

It's important to note that you have to itemize your deductions in order to receive the full benefit of donating appreciated stock. But even if you take the standard deduction, you can still avoid the capital gains tax you'd otherwise have to pay.

Two seniors sitting at a table with a laptop and calculator.

Image source: Getty Images.

4. Qualified charitable distributions

A qualified charitable distribution (or QCD) is a direct distribution from your IRA to a nonprofit organization. In order to use a QCD you must be at least 70 1/2 years old, but it can be an extremely powerful strategy to save on taxes.

Instead of withdrawing money from an IRA directly and then donating it to charity for a deduction, the QCD bypasses your checking account. By doing so, it means you never receive the income from your retirement account. As a result, not only do you not pay taxes on the IRA distribution, but you can also avoid other taxes that could be affected by a higher gross income. That includes taxes on Social Security benefits.

Qualified charitable distributions can also count toward required minimum distributions, or RMDs. RMDs start the year you turn 73 if you haven't had to start taking them already.

Super-generous retirees should know there's a $100,000 per person per year limit on qualified charitable distributions.

5. Strategic Roth conversions

Some retirees may benefit from converting savings in a traditional retirement account to a Roth account. You'll have to pay income taxes on the amount you convert, but it may be worth it in the long run.

The strategy is most effective for those still in the early days of their retirement who haven't started collecting Social Security yet. They'll have the most flexibility to make it work and the longest amount of time for the Roth conversion to pay off.

If you can lock in a low tax rate on a Roth conversion in your early to mid-60s, you can avoid much higher taxes later when you may also have to pay taxes on Social Security or have higher-than-necessary required minimum distributions. Since Roth IRA withdrawals don't count toward your taxable income at all, they can have an outsized effect on your tax savings in retirement.

If you have room to spare in the 10% and 12% tax brackets, you might want to consider locking in those tax rates now to avoid paying a higher tax rate in the future.

Mix and match

Not all of these tax-saving hacks will work for you. Find the ones that do, and combine them in a way that makes the most sense for your situation. If you can make some smart maneuvers before the end of the year, you could set yourself up for a lot of tax savings come April.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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