If you are nearing retirement, it is important to recognize, plan for, and minimize the tax bite that awaits. Most people are used to having taxes withheld from their paycheck, but when you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability. You can make estimated payments each quarter, or some people just have taxes withheld from their pension, social security, or IRA distribution.
If you have yet to file for social security, you can choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld. If you are withholding taxes, just be sure enough taxes is withheld overall. If you’re making estimated quarterly payments, make sure they are sufficient, otherwise, you may face a penalty.
Another tax trap is failure to take your required minimum distribution (RMD) from your traditional IRA. Let’s be very upfront about this: failure to take your RMD could subject you to a steep penalty of 50%. Generally, RMDs are minimum amounts that traditional IRA owners must withdraw annually starting with the year they reach 70½ years of age. If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½.
In some cases it may be beneficial to convert some of your tax deferred traditional IRA money into a tax free Roth IRA. You pay taxes upfront on the amount converted, then it will help shelter future gains and distributions from taxes. It’s a strategy that can possibly help minimize taxes long-term.
Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning and we can help.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.