Tax Strategies During Retirement

Tax Strategies

When planning for retirement or in you are already in retirement, taxes is a major concern.

Tax Deductions

For those of us already in retirement, the two most important sources of retirement income are your Social Security benefits and distributions (withdrawals) from our retirement accounts such as IRAs and pensions from our employers which includes our 401k accounts.

If you have done some smart tax planning during your working career by contributing to a Roth IRA or Roth 401k with your employer; you are already ahead of the majority of taxpayers that are in retirement.

IRAs, 401ks and other company pensions are fully taxable when you make a distribution (withdrawal), the exception is Roth accounts which enjoy a tax-free withdrawal. I am assuming of course that the individual is over 59 ½ to escape the 10 % early withdrawal penalty.

Withdrawals from employer retirement plans and IRAs are taxed as ordinary income, however your Social Security benefits may or may not be taxable depending on total income. State tax rules differ regarding Social Security and employer pensions, depending on your state of residence.

One tax strategy is “spend down” IRAs in early retirement to delay claiming Social Security. For every year beyond your full retirement age up to the age of 70, your will receive approximately 8% increase per year until you reach your 70th birthdate.

Another tax strategy would be to consider is converting IRAs and other pre-taxed retirement accounts into a Roth IRA. You can move smaller amounts each year, pay the taxes on that year’s withdrawals. This allows you to span your conversions over numerous years to minimize the tax bite.

As with most tax issues, consult with a tax professional if you need help or have other tax issues to consider. I provided below a video for your review concerning Social Security taxes present by TurboTax.