How to Maximize OBBBA Tax Breaks for Retirees and Pass It On
Since becoming law, the One Big Beautiful Bill Act (OBBBA) has been generating headlines. While much of the conversation revolves around politics, the legislation created new opportunities for retirees to become more strategic with how and when they recognize income.
Significant opportunities for retirees
One of the more significant retirement provisions under the new law is the expanded deduction available to many retirees. But receiving the full benefit isn’t automatic. Eligibility is based on your modified adjusted gross income, so withdrawals from traditional retirement accounts, pension income, capital gains and, even Roth conversions can all impact whether you qualify.
That makes coordinating when and how you recognize taxable income especially important. Taking time to plan may help some retirees keep the deduction while also reducing taxes on Social Security benefits.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Retirees may also want to revisit whether Roth conversions are appropriate. Moving money from a traditional IRA into a Roth IRA and paying taxes on the converted amount now may help some retirees reduce future taxable income. This can also create additional future tax flexibility.
The One Big Beautiful Bill Act permanently extends many of today’s lower income tax rates, which gives retirees more certainty when evaluating whether converting assets over time make sense with their retirement plan. Combined with the delayed age for required minimum distributions (RMDs) under the SECURE 2.0 Act, many retirees may now have more time to strategically convert portions of their retirement savings before they must start taking withdrawals.
Rather than waiting for RMDs to increase taxable income, converting assets gradually over time may help retirees better manage future tax obligations while staying in a comfortable tax bracket.
Looking ahead
But tax planning isn’t just about your taxes right now — it also includes considering how the decisions you make today might affect your spouse, your heirs, and your future decades from now.
A commonly overlooked scenario is the death of a spouse. Despite the fact that a household’s income is often reduced after the death of a spouse, the surviving spouse will usually file as a single taxpayer the following year. Because single tax brackets reach higher rates at lower income thresholds than married couples who file jointly, many surviving spouses end up paying more in taxes.
However, taking time to plan strategies like Roth conversions while both of you are alive may help reduce that future tax burden, known as the widow’s penalty.
This same principle also applies to estate planning. While many retirees hope they can give their remaining savings to their children or grandchildren, inheriting a large, pre-tax retirement account could also mean inheriting a future tax liability.
This can be overwhelming, especially to an heir who may not have been involved in your plan. However, including tax management strategies in your estate plan can help your loved ones avoid that risk. It may even help preserve more of those assets for future generations.
Take time to create a tax plan
Although it has introduced several new tax opportunities for retirees, the OBBBA alone isn’t enough to determine how much you’ll ultimately keep.
However, taking the time to make a thoughtful plan, with the help of a professional, can help.
Retirees who coordinate withdrawals and manage taxable income, while considering the long-term impact of today’s decisions, may be better positioned to preserve more of their savings for themselves, their families and future generations.
Investment advisory services offered through Brookstone Wealth Advisors, LLC (BWA), a registered investment advisor. BWA and Beckett Financial Group are independent of each other. Insurance products and services are not offered through BWA but are offered and sold through individually licensed and appointed agents.
