4 Year Long Tax Tips for Retirees
Whether you’re just easing out of the workforce or you’ve been in retirement for a few years now, making the right financial moves is critical. If you’re working with an advisor or taking a look at your finances yourself, one central goal during retirement is protecting your wealth from unnecessary taxes.
In many cases, there are ways to avoid owing more taxes, but usually, this requires proactive action beyond tax season. Below, we’ll explain four tips you can utilize throughout the year to help minimize your tax obligations in retirement.
Tip #1: Take Your Required Minimum Distributions (RMDs)
An RMD is an amount that must be withdrawn from your retirement account. These required withdrawals begin when you, the retirement plan account owner, reach age 72. The rules apply to employer-sponsored retirement plans, traditional IRA plans, and Roth 401(k) accounts, but they don’t apply to Roth IRAs while the account owner is still alive.
Some IRA custodians and retirement plan administrators might be able to find out what your RMD is for you, but the responsibility ultimately falls on you. To find out what your RMD is, the IRS provides life expectancy tables to utilize according to your circumstances. If you do not withdraw the RMD (or withdraw the incorrect amount), the amount not withdrawn will be taxed at 50 percent, which is why it’s critical to take your RMDs and withdraw the correct amount.1
Tip #2: Manage Your Income Combinations
As a retiree, a portion of your income will likely come from Social Security. However, not all of your benefits are taxable, and there are ways to minimize or, at times, eliminate taxes on your Social Security benefits.
If half of your Social Security benefits in addition to your other income is higher than the base amount for your status, your benefits will be taxable. By strategically managing all your income sources (such as pension payments, dividends, or part-time jobs), it’s possible to lower the portion of benefits that will be taxed. Rules regarding Social Security income taxes also vary from state to state, so always check with your state’s regulations to determine the best solution for you.2
Tip #3: Figure Out if You Need to Pay Quarterly Taxes (If Not, You May Decide to do it Anyway)
If you don’t have taxes withheld automatically, you may need to pay estimated tax payments. Individuals who are expected to owe $1,000 or more—or those whose withholding and refundable credits are 1) less than 90 percent of the tax owed or 2) at least 100 percent of the tax on the previous year’s return—must pay estimated taxes.
In some cases, you might decide to pay quarterly taxes, even if you are not required to, in an effort to avoid the inconvenience of paying a large sum all at once. If you miss a payment or underpay, you may be charged a penalty.3
Tip #4: If You’re Moving to a New State, Get to Know Its Tax Laws
If you’re relocating to a new state during retirement, consider the impact of the move on your financial situation, as tax laws vary by state. For example, some states, like Florida and New Hampshire, don’t tax income or only tax on dividends and interest. However, they may have higher property taxes. For example, New Hampshire’s property taxes are high compared to the rest of the country. In addition to nicer weather or a more serene lifestyle, you might decide to move to a new state in an effort to save on taxes.4
In many cases, an individual or couple is working with a fixed amount of wealth that must last throughout retirement, which is why taking the right financial steps is essential. By working with an advisor and keeping these four tips in mind during the year, you can make sure you’re not paying more than you need to. When it comes time to finalize gifting to your children or grandchildren, you can further reduce taxes by incorporating other strategies, like charitable giving, into the equation.
As always, let us know if you have any questions.
Best,
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CRA Financial, LLC [“CRA]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CRA. Please remember to contact CRA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CRA is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of CRA’s current written Disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.crafinancial.com. Please Note: If you are a CRA client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your CRA account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your CRA accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Note: Limitations: Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any professional designation, certification, degree, or license, or any amount of prior experience or success, should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if CRA is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (to the extent applicable). Unless expressly indicated to the contrary, CRA did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of CRA by any of its clients. ANY QUESTIONS: CRA’s Chief Compliance Officer remains available to address any questions regarding rankings and/or recognitions, including the criteria used for any reflected ranking.