Tax Planning
Tax Planning tests how retirement decisions change a client’s tax liability across accumulation, distribution, and estate transfer. The exam focuses on marginal bracket management, account titling, and the timing of income rather than memorizing forms.
Core rules and concepts
- Taxable income is gross income less above-the-line deductions and the standard or itemized deduction. Traditional IRA and 401(k) distributions are ordinary income; qualified Roth distributions are tax-free when the five-year rule and a qualifying event are met.
- Nondeductible IRA basis is recovered pro rata across all traditional IRAs, not per account. Inherited traditional IRAs are generally taxable to the beneficiary; most non-spouse beneficiaries must empty the account within 10 years.
- Long-term capital gains and qualified dividends use 0%/15%/20% brackets stacked on ordinary taxable income. The 3.8% net investment income tax applies above $200,000 single/$250,000 married-filing-jointly MAGI, and the 0.9% additional Medicare tax applies to wages above the same thresholds.
- QCDs let IRA owners age 70½ or older send up to $105,000 (2024, indexed) directly to charity, excluded from income and counted toward RMDs.
Worked example
A single filer has $50,000 of ordinary income and $20,000 of long-term capital gain. The 2024 standard deduction is $14,600, leaving $35,400 of taxable ordinary income. The 0% long-term capital gain bracket runs to $47,025 of taxable income, so $11,625 of the gain is taxed at 0% and the remaining $8,375 at 15%, producing $1,256 of tax on the gain. A $20,000 Roth conversion would push more gain into 15% and raise taxable income.
Traps
Treating a deduction as a credit; ignoring the pro-rata basis rule; assuming all Roth distributions are tax-free before five years; forgetting that RMDs cannot be converted; and overlooking state tax, IRMAA, and estimated-tax safe harbors when doing a year-end Roth conversion.