How Women Can Avoid Unnecessary Tax Consequences

Zoe Team and Susan Koe, MBA, CFP® (Zoe Network Advisor)

Jun 30, 2022

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Women often face unique tax hurdles due to career breaks, part-time work, or longer life expectancies.
Proactive tax planning is essential to maximize retirement savings and mitigate long-term liabilities.
Utilizing tax-advantaged accounts effectively can significantly improve financial stability over a woman’s lifetime.

Frequently Asked Questions

Why do women need specific tax planning?

Women often experience career gaps and earn lower average lifetime wages. Strategic planning helps ensure these factors don’t disproportionately erode retirement security compared to men.

How can tax-advantaged accounts help?

Accounts like IRAs and 401(k)s allow for tax-deferred growth or tax-free withdrawals, which help maximize the impact of smaller or more sporadic contributions over time.

Is retirement planning different for women?

Yes, due to longer life expectancies and different career patterns, women often need to accumulate more capital to cover longer retirements while managing tax exposure.

In addition to the retirement planning challenges you may face as a woman, you need a comprehensive financial plan that includes the most relevant tax strategies. Analyzing the differences between a Roth IRA and a Traditional IRA is an example of how you should focus on the possible steps during every life transition that help you lessen your tax burden and avoid unnecessary taxes.

As women, we tend to face more retirement and tax planning challenges than men. Is this a surprise? Not really. Higher health care costs, longer expectations, and more time out of the workforce contribute greatly to this. Unfortunately, women are also less likely than men to have a financial plan. A recent survey by US Bank found that 47% of women associate negative words like fear, anxiety, dread, and inadequacy with financial planning.

Regardless of the anxiety surrounding financial planning, there are things you can do to lessen your tax burden and avoid unnecessary taxes. You should focus on the possible steps during every life transition that help you achieve these outcomes. In addition to the retirement planning challenges you may face as a woman, you need a comprehensive financial plan that includes the most relevant tax strategies.

4 Tax Planning Tips For Women During Life’s Transitions

1. Roth IRAs

As a financial planner, it’s exciting when I get the opportunity to discuss Roth IRAs with someone that’s just starting their career. These individuals have decades for their investments to grow tax-deferred and ultimately be tax-free at distribution. The premise behind a Roth IRA or Roth 401(k) is that you pay taxes now rather than later. Substantial savings can lead to this ideal situation, especially for younger investors. For example, let’s assume a 25-year-old contributes $6,000 yearly to a Roth IRA instead of a Traditional IRA. Assuming average market returns, individuals will have about $790,000 in their Roth IRA at age 65. If they choose a Traditional IRA, their after-tax balance at age 65 would be $630,000. Notice the importance of this decision; it saved them $160,000.

2. Roth Conversions

In the right situation, Roth conversions can also offer substantial tax savings. The case with the right conversions involves taking assets in a pre-tax account such as a Traditional or rollover IRA, and moving them to a Roth account. Consequently, you pay the taxes in the year the conversion occurred. This strategy works well for investors that are newly retired. In those first few years of retirement, investors are often in a lower tax bracket. The placement in lower tax brackets happens when there is a delay in their Social Security and they have not yet reached the Minimum Required Distribution age (72). Doing Roth conversions in those lower tax years will also lower the Required Minimum Distribution that will need to be taken later on.

Roth conversions also work well for investors looking to pass wealth tax-free to loved ones. However, these conversions do not make sense for everyone, so please make sure you consult with a financial advisor before.

3. IRMMA (Medicare - Income Related Monthly Adjusted Amount)

Income Related Monthly Adjusted Amount is a surcharge on Medicare beneficiaries who earn over $91,000 annually. The tax is added to the Part B and Part D premiums. For example, in 2022, for an Individual making under $91,000, the monthly Part B Medicare premium is $170.10. This amount jumps to $544.30 per month for someone making over $170,000!

The income from your income tax returns two years prior determines your IRMMA. For example, your 2020 income tax return is used for your 2022 Medicare premiums. It is important to remember this because your earnings establish the amount you will pay when you start Medicare at age 65 or 63. As you can see, the IRMMA brings up obvious tax planning opportunities. You can and should appeal your IRMAA determination if you have had a life-changing event, such as a job loss or divorce.

4. Tax Diversification

Old school advice was to sock away as much as possible in pre-tax deferred accounts such as Traditional or SEP IRA’s. The issue with this plan is that it leaves you with no control over your tax situation. Each dollar that comes out of those accounts is taxed as ordinary income. A better approach is to work toward having assets in the following tax categories: taxable accounts, tax-deferred accounts, and tax-free accounts. Doing so gives you more flexibility in meeting your retirement income needs tax-efficiently, and allows for more significant tax savings.

Retirement and Tax Planning Closing Thoughts

Avoid Unnecessary Tax Consequences

As women, we need a comprehensive financial plan that includes tax strategies for each stage of life. Surveys have shown that 65% of people with a written financial plan say that they feel financially stable, while only 40% of those without a plan feel the same level of comfort. From taking advantage of Roth IRAs and Roth Conversions to diversifying your assets based on tax categories, there are plenty of strategies at your disposible to manage life’s many transitions.

My last piece of advice is: don’t do it all alone. A financial advisor can be a great asset when it comes to getting personalized advice for your specific situation. Most importantly, they will ensure your plan is aligned with your long-and-short-term wealth goals.

4 Tax Planning Tips For Women During Life’s Transitions

1. Roth IRAs

2. Roth Conversions

3. IRMMA (Medicare - Income Related Monthly Adjusted Amount)

4. Tax Diversification

Retirement and Tax Planning Closing Thoughts

Avoid Unnecessary Tax Consequences

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