It doesn’t matter if you’ve been a “super saver in your working years, you can still decrease your retirement income by making some elementary tax errors when you stop working, says Money Talks News’ recent article entitled “5 Tax Mistakes to Avoid in Retirement.” The article provides some costly tax mistakes you should know and avoid after you retire.
Ending your contributions to retirement accounts. It makes sense that the longer you can contribute to a retirement account, the better off you’re going to be, right? You have time to build up your portfolio and your money has longer to earn compounding interest and returns. The SECURE Act eliminated the age limit for contributing to a traditional IRA. If you’re a retiree who works (or has a spouse that works), you can keep contributing, which will lower your taxable income. You might also be eligible for the saver’s credit.
Not planning for RMDs. Many tax-advantaged retirement accounts have required minimum distributions (RMDs). These are mandatory annual withdrawals that start the year you turn age 72. In general, your RMDs are taxable as regular income. Therefore, once you reach 72 and are required to withdraw a certain amount of money from your account every year, you could see a larger tax bill. Prepare for this, perhaps by using qualified charitable distributions.
Forgetting the taxes on Social Security. Social Security benefits can be taxable. The part of your benefits that’s taxed depends on your income, so there are some moves you can make to reduce your income and drop your Social Security taxes. This includes working less in retirement or using certain tax deductions to reduce your income. You can also delay taking benefits a little longer to take more time to plan.
Not leveraging a health savings account. Here’s another tax-advantaged way to save for retirement, especially for health care expenses. A health savings account (HSA) can be a smart choice, if you’re eligible for one. With an HSA, your contributions are pre-tax (that’s saves you money now), and the withdrawals are tax-free, provided they’re used for qualified medical expenses. Think about using an HSA as a tax-free way to pay for many healthcare costs in retirement. Later, you can also use an HSA as a backup IRA after reaching age 65 because taxes need to be paid on non-qualified withdrawals.
No strategy to minimize taxes in retirement. The best way to minimize taxes in retirement is to put together a plan that maximizes your tax efficiency. Look at numerous factors, such as the age you decide to claim your Social Security benefits and the order in which you take distributions from your retirement accounts. See if it makes sense to draw down accounts subject to RMDs before other accounts and think about where an HSA or taxable investment account might help you. Don’t forget to include your spouse’s retirement plans, as well as how you plan to coordinate your retirement and Social Security benefits, when creating a tax strategy.
Reference: Money Talks News (Jan. 25, 2021) “5 Tax Mistakes to Avoid in Retirement”
Suggested Key Terms: Retirement Planning, Health Savings Account, Social Security, Tax Planning, Required Minimum Distributions (RMDs)