Five Tips for Tax Management in Retirement

Tax Management in Retirement

Many people mistakenly believe that taxation will be easier in retirement. While this is true for some taxpayers, others may find that managing Social Security, investments, and retirement contributions can be somewhat complicated. So it’s important to strategize and prepare. If you’re already retired or about to be, here are five tips to help you in tax management in retirement.

1. Follow the RMD rules

The Every Community Retirement Enhancement Act 2019 (SECURE Act) significantly changed the rules for mandatory minimum distributions: Once you reach age 72, you must receive your first minimum distribution by April 1 of the following year; minimum distributions are based on last December 31 and are calculated for each account by dividing the IRA or pension plan balance as of December 31 by the life expectancy rate set by the IRS. However, if distributions are not made on time and there are double payments, you will be taxed at a higher rate. Pay close attention to when and how much you need to withdraw.

2. Diversify retirement income

It is important to include both taxable and non-taxable pension income in your planning. Roth conversions, municipal bonds, life insurance, IRA withdrawals, and other investments should also be considered as part of a healthy mix. Diversification not only helps manage taxable income but also provides stable income regardless of inflation and market fluctuations.

3. Add a Roth IRA

Before you retire, you should consider adding a Roth IRA to your retirement portfolio – Roth accounts are not funded on a pre-tax basis, allowing you to withdraw money in retirement without increasing your taxable income. If you already have a traditional IRA, you should consider converting it to a Roth annuity so you can make tax-free withdrawals in the future.

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4. Deferring Annuity Collection

Once you reach retirement age and are able to withdraw your retirement savings, you should, if possible, wait a little longer. Not only will your account continue to grow, but you won’t pay higher tax rates either. However, once you reach age 72, you should be able to take the minimum deductions.

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5. Make a gift

As mentioned earlier, you are required to pay RMDs at age 72. One way to reduce this amount (and lower your tax bill) is to make a Qualifying Charitable Donation (QCD), which allows you to give up to $100,000 tax-free directly from your IRA to a qualified charity. This amount is deducted directly from your RMD. Because the money is donated, it is not considered income. It is important to know that such donations are not treated as a regular deduction for gifts.

Don’t forget state taxes

While it’s important to plan for federal taxes, don’t forget to check your state tax obligations as well. Depending on where you live, you may be subject to income taxes and may also have to pay other state and local taxes. It is highly recommended that you work with a financial advisor or Queens Tax Audit Solutions to ensure that you are fully prepared for your tax obligations in retirement.

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