Many Americans look forward to retirement as a time when the pressures of the working world are behind them. However, it can also create new challenges—especially around tax season.
Changing income and the absence of a regular paycheck may require some shifts in how newly minted retirees approach their year-end finances. But with a little advance preparation, you can sail through your golden years confident and worry-free.
1. Delay Social Security
Just because you can start receiving Social Security at age 62 doesn’t mean you have to. Age 66 is when your full benefits kick in, but delaying the start date even more puts more money in your pocket: Benefits increase by 8 percent each year up until age 70.
So the longer you wait to begin collecting Social Security, the more income you’ll ultimately receive from it. Part of that money may be taxed, depending on your other sources of income, so it’s best to have a complete picture of your retirement finances to see how much Social Security benefits factor in.
2. Manage your investments
All those traditional IRA (individual retirement account) and 401(k) contributions finally come into play once you retire. After age 70, withdrawals from these accounts become mandatory.
Consider contributing to a Roth 401(k) or converting your traditional accounts to a Roth IRA. Both have strong benefits, like eliminating the mandatory withdrawal requirement and allowing the withdrawals you make to be tax-free.
3. Be asset savvy
Selling your home or liquidating stocks will flush your accounts with large sums of cash, leading to large capital gains taxes, which are best avoided during retirement. In addition, earning a high amount of taxable income in one year will dramatically raise the cost of Medicare premiums.
Reducing expenses, giving to charity, and utilizing available cash will keep you out of a higher tax bracket, which will make living on a limited or fixed income more manageable. With some careful planning, you can keep your assets from turning into liabilities.
4. Know how your retirement income is taxed
Social Security benefits, pension income, stock dividends, IRA distributions, and 401(k) withdrawals are all taxed at different rates. Seek the assistance of a certified tax advisor to sort through all the nitty-gritty and help minimize your tax obligations for each form of income.
Pro tip! There are several states that are financially retirement friendly, with no taxes on income, Social Security benefits, or government pensions—just something to consider as you choose where to spend the bulk of your retirement.
5. Take advantage of the tax credit for the elderly
If you are 65 or over and your AGI (adjusted gross income) is fairly low, you may qualify for a federal tax credit that will lower your overall income level and decrease any federal taxes you may owe. You may also be able to deduct certain medical expenses that go beyond the standard deductions, also reducing your overall tax liability.
The bottom line
By being fiscally smart, you can ensure that you won’t need to radically change your lifestyle just because you’ve stopped punching the clock. Instead, staying on top of your finances and minimizing your tax obligations can help you change your lifestyle for the better!