Tax Strategies for Retirees

It is never too early to start saving for retirement and recent tax reform has enhanced certain planning opportunities. You may still have time to accumulate significant retirement assets, provided that you plan ahead, stay disciplined, and regularly review your tax strategies.

Most people spend years planning and saving for retirement. However, they do not realize the tax implications on income received after they stop working. After the age of 65 there will most likely be a reduction in the amount of taxes owed, but it is still important to come up with a tax strategy and to plan ahead in order to minimize your IRS tax bill.

Tax Strategies for Social Security Benefits

For Social Security benefits, a portion of them may be taxable. This depends on your marital status and your total income. Your AGI (half of your Social Security benefits plus your projected income from all other sources), plus any tax-free interest from municipal bonds or foreign income, is called your ‘provisional income.’

If this sum is greater than $25,000 for singles (or $32,000 for married couples filing jointly), up to half of your Social Security benefits may be taxable. If your provisional income exceeds $34,000 for singles (or $44,000 for married couples filing jointly), up to 85% of your Social Security benefits may be taxable.

Other income sources include distributions from IRAs, 401(k)s, company pensions and annuities, and investment earnings.

Tax Strategies for IRAs and 401(k)s

For IRAs and 401(k)s, earnings and contributions may grow tax-deferred, but distributions are fully taxable. If withdrawals are made after the age of 59½, they are free of penalties.

If you have an IRA or 401(k) account, you must begin making withdrawals by April 1st of the following year after you turn age 70½ ? you must also pay taxes on these distributions.

Tax Strategies for Roth IRAs and Roth 401(k)s

For Roth IRAs and Roth 401(k)s, however, there are no minimum distributions. You may also make tax-free withdrawals from Roth accounts that have been owned for at least five years, if you are at least 59½ years old.

Note: The Worker, Retiree, and Employer Recovery Act of 2008 suspends the rules for required minimum distributions (RMDs) from certain qualified retirement accounts for the year 2009 only.

While most people will pay taxes on their retirement income, there are tax strategies you can use to reduce the taxes owed. Instead of delaying distributions until you need them or until you have to withdraw them, it may be a good idea to withdraw more funds in the years when you claim tax deductions which temporarily lower your tax rate. For instance, you may take advantage of the year(s) in which you itemizing deductions, such as medical expenses or charitable donations.

Another tax strategy is to convert a traditional IRA to a Roth IRA, which eliminates future tax liabilities ? especially useful if you want to pass funds to your heirs. While you will owe taxes on the funds converted, the inheritance rules for Roth IRAs are generally less complex. You can also cash-in your traditional IRA and purchase a life insurance policy or tax-free bonds that allow for tax-free inheritance.

Additionally, you may be eligible for the 0% capital gains tax rate that affects the 10% and 15% tax brackets through 2010. This depends on the types of investments you have and the amount of your taxable income.

Overall, it’s important to understand your options, develop a solid tax strategy, and stay up-to-date on tax law changes.

Once you have reviewed your choices, you can determine the plans that work best for your financial and personal situation.

By remaining educated about the available retirement strategies and their potential tax benefits, you will be able to save money both now and later.

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