THE RETIREE’S GUIDE TO PLANNING TAX STRATEGIES

THE RETIREE'S GUIDE TO PLANNING TAX STRATEGIES

Believe it or not, planning your ahead in time can helps you manage them efficiently once you have retired. In order to do so, you must have a thorough understanding of the various options that are available to you. Once you gain this understanding, you will be able to choose the right strategies which will help you keep your tax bill as less as possible. With the right decision, retirees can gain some control over their taxes thanks to the ability to being able to decide the amount that they need or want to withdraw from their retirement plans.

Here are a few tips to help you get started with planning your tax strategy:

  • Exemptions and Deductions: Make sure to take complete advantage of all personal exemptions and/or itemized or standard deductions. These will help you determine the amount of your income that should be tax-free. For retirees, taxable distributions can be coordinated with their medical expenses, property taxes and mortgage payments.
  • Increase your Retirement Contributions: This can be particularly useful if you have multiple available deductions. You can try withdrawing more retirement funds than when is necessary in a given year once your deductions exceed the taxable income. This will help you avoid paying extra taxes in the next year(s) which could have a low or even zero tax rate.
  • Defer retirement plan distributions: By deferring your retirement plan distributions until they are required by tax law or until you need them, you can keep your taxable distributions to a minimum, and therefore push your income to subsequent tax years. Taxpayers who wish to go with this plan should start withdrawing funds from their traditional IRA plans and 401(k)s once they reach the age of 70 1/2. Distributions should start by April 1 of the year next to the year in which the taxpayer turns 70.5 years; this is known as the “required beginning date.” You can calculate the minimum amount to be distributed by dividing your account balance by the life expectancy figures published by the IRS in Publication 590. To make things easier, you can try web-based calculators to estimate the minimum required distributions.
  • Elderly-specific tax credits: While taxpayers of and above the age of 65 are eligible for the special tax credit, actually qualifying for the same requires some careful planning, for the adjusted gross income (AGI) must be within certain limits.
  • Maximize your tax-free income: By selling their main home, taxpayers can have up to $250,000 exempted from their capital gains. If you are married, this figure will increase two-fold to $500,000. Interest that is earned from municipal bonds is also tax-exempt.

How is Retirement Income Taxed?

Retirees have a range of sources from which they earn their income, from pensions and annuities to Social Security benefits. Each of these sources are subject to a separate set of tax rules.

Social Security: Depending on your income profile, your Social Security can stand to partially or fully tax-free. While finding out where you stand does require some careful and complicated calculation, it is worth the benefits you will get in terms of less taxes and better planning.

Pension or Annuity Income: These can partially or fully taxable. Distributions will be fully taxed in the event that all contributions to your pension were made with tax-deferred dollars. However, if you have contributed any after-tax dollars for funding your plan, you can get some cost basis in the plan contract.

IRA Distributions: Depending upon the kind of IRA you have, your individual retirement account’s distributions can be fully or partially taxable, or even completely tax-free. Distributions get fully taxed when the taxpayer has a deductible traditional IRA. However, if you have any basis in a non-deductible traditional IRA, your distributions will be partially tax-exempt. Roth IRAs are mostly totally tax-free so long as you full two basic requirements, namely, your first Roth IRA should have been made at least 5 years before any distribution, and the funds should be distributed after you have reached the age of 59 1/2.

401(k) Plans: 401(k) plan distributions are fully taxable on account of the fact that these contributions were not included in your taxes when they were made. These get the same treatment as Roth IRA distributions.