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Retired Military Finances 301: Tax Strategies for High Earners Thumbnail

Retired Military Finances 301: Tax Strategies for High Earners

Taxes

A lot of retired Senior Military Officers and NCOs find themselves earning a lot of money. A good thing. They also find themselves paying a lot in taxes. Not such a great thing. But there are ways to reduce the sting.

Build Your Team of Professionals

You might build a team for any number of pursuits, from organizing a baseball team to putting together people to run a business. It’s important to remember that a team is not only an organization of people but also an amalgamation of talents. 

Building a financial team to tackle your taxes may often mean talking to more than one person. Your trusted financial professional can speak to a wide range of financial issues, but they may want to consult others who have specialized training.

Ask your financial professional if they have worked with a CPA or Enrolled Agent (EA) who would be helpful in this situation. It’s possible that they know someone who fits your needs.

Tax-Focused Investment Strategies

Once you have the right team of financial professionals who understand your financial situation, there are some investment strategies you may consider using this year.

Backdoor Roth IRA

If you are a high earner with an income above the IRS’s income limit for Roth IRA accounts, you still have the option to create a backdoor Roth IRA. Just as it sounds, this option allows high earners to bypass the income limits and still utilize the tax advantages of a Roth IRA account.

To create a backdoor Roth IRA, you’ll need to:

  1. Open and contribute to a traditional IRA.
  2. Convert your traditional IRA to a Roth IRA account (your account administrator will provide the necessary paperwork and instructions to do this).
  3. Once tax season rolls around, pay taxes on the contributions (essentially, you’re paying back the tax deduction you received when initially contributing to your traditional IRA). 
  4. Pay taxes on any additional gains your traditional IRA account may have made over time.

A backdoor Roth IRA may be beneficial for those whose income level is above the ceiling limit set by the IRS. Additionally, it’s important to remember that Roth IRAs do not have required minimum withdrawals, only traditional IRAs do.

When considering a backdoor IRA, evaluate the tax obligations you might pay today versus the tax benefits you may realize toward retirement.

Tax-Focused Gifting

Smart moves can help you manage your taxable income and taxable estate. For instance, if you’re making a charitable gift, giving appreciated securities that you have held for at least a year is one choice to consider. In addition to a potential tax deduction for the fair market value of the asset in the year of the donation, the charity may be able to sell the stock later without triggering capital gains. 

This discussion of tax-focused giving is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your financial, tax, and legal professionals before modifying your gifting strategy. 

The annual gift tax exclusion gives you a way to remove assets from your taxable estate. You may give up to $16,000 ($32,000 if you are married) to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption of $12.06 million for 2022.1 Managing through the annual gift tax exclusion can involve a complex set of tax rules and regulations. Before adjusting your strategy, consider working with a professional who is familiar with the rules and regulations.

Tax-Loss Harvesting

Tax-loss harvesting refers to the practice of taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change, and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can be an approach to managing your tax liability.

Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can potentially be carried forward to offset capital gains next year.2 But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same in the coming years.

By taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year. Before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.

If you’re looking into this strategy, familiarize yourself with the IRS’s “wash-sale rule.” This rule indicates that investors can’t claim a loss on a security if you buy a “substantially identical” security within 30 days before or after the sale.2

With these strategies in mind, there are things you may be able to do now to address both your current tax obligation and those you may be required to address further down the road.

Military Finances are Different

While a high earning civilian has tax obligations similar to a high earning military retiree, not everything about their finances is the same. As a military retiree you have tax and investment options and issues different from your civilian peers. That is why we think you should work with a Financial Advisor or Planner that works with military members each and every day. If you'd like to find out how we do things, give us a call or use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 101: I Got a Refund on My Taxes, but the IRS Penalized Me for Under-Withholding. What's Up?


Retired Military Finances 301: ILITs


Retired Military Finances 401: What High-Level Executives Need to Know About SERPs



  1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022
  2. https://www.irs.gov/publications/p550

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Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.