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Are You Following These Tax Tips for Your Retirement?

June 11, 2019

 

Taxes are an inevitable part of life, and they don’t go away when you retire. In fact, you will need to learn to think about your taxes differently, as your income shifts from something you receive from an employer to something that comes in installments.

Yet many people in their golden years have no idea how to plan for taxes during their retirement. According to a recent survey by Nationwide Retirement Institute, almost three-quarters of retirees are only somewhat knowledgeable or not knowledgeable at all about taxes in retirement.

The good news is, retirement gives you a lot of control over your tax liability because you decide when to access most of the money available to you at this time. Here are some tax strategies you should follow to ensure you get the most favorable outcome with your taxes.

 

1. Get Informed About Social Security

Most people assume Social Security is not taxed, but that isn’t true. If, after you take your deductions, you make less than $25,000 per year as a single person or under $32,000 as a couple, your Social Security income will not be taxed.

Yes, those numbers sound small, so you may wonder if anyone qualifies for the Social Security tax waiver. But there are a number of caveats that draw many people below that income level. Things that do count toward your income include:

  • Annuity income, in some cases

  • Roth IRA income

  • Income from municipal bonds

If your income falls above those levels, you could be taxed on anywhere from half to 85 percent of it. 

 

2. Convert Your Traditional IRAs and Retirement Funds

When you withdraw money from your traditional IRA or 401(k), it is taxable. But many people have these types of accounts because they got deductions for their contributions to the funds.

Now, Roth IRA contributions can be taxed, but when you withdraw your money from a Roth, it is tax-free. So it makes sense to convert your accounts to Roths after you hit retirement. You will be taxed for this conversion, but you can grow the money in the account without worrying about taxes after that.

You do want to be careful about how much you convert — the higher the figure, the more you will pay. Jay can advise you on ways to go about this process slowly and avoid any unnecessary tax burden.

 

3. Create Your Investment Strategy Based on Tax Classification

Your savings should be in different types of funds — this is what’s known as diversifying — and you should optimize your tax savings on them. You can get advice from Jay on the best plan for each one of your accounts. For example, it pays to be aggressive with your Roth because it remains tax free as it grows, so you can also take the most risks with it.

 

4. The Lower Your Taxable Income, the Lower Your Taxes

You want to use the cash you have on hand to improve your income situation. Target holdings that don’t get a lot of appreciation that you can liquidate and not have to pay huge tax consequences.

When you pay attention to your tax liability, there will be fewer surprises come April 15. Jay can advise you on taxes and more related to your retirement. Contact him today to discuss your future.

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