Paying Taxes In Retirement Is A Big Burden

According to Yahoo News and US News & World Report, paying taxes in retirement is going to be a huge burden that many retirees haven’t planned for.  While lots of us are trying to grow our retirement nest egg, few of us are planning on the tax consequences necessary to support our retirement lifestyle.

Paying Taxes in Retirement

Yahoo cited Jeff Fosselman, a senior wealth advisor at Relative Value Partners (Northbrook, IL) who said that “taxes are likely to be one of, if not – the largest expense in retirement“.  Retirees that save up a significant savings for retirement can see that money pre-maturely chipped-away by taxes whether you like it or not!

Too many seniors face a “tax torpedo” in their later years. They may have saved all their money in traditional IRA or 401(k) accounts, which have taxable withdrawals that will cut into your spending power. – Paul Markowich, Firstrust Financial Resources – via Yahoo News

The Required Minimum Distribution (RMD)

Did you know that the government has set a deadline on when you must begin withdrawing your money from traditional retirement accounts?  It’s called the Required Minimum Distribution (or RMD).  You generally must begin taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account(s) when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner. Your RMD is the “minimum” amount you must withdraw from your account each year. According to the IRS, there are a couple things to remember about RMD’s;

• You can withdraw more than the minimum required amount.
• Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

While lots of us are trying to grow our retirement nest egg,  few of us are planning on the tax consequences necessary to support our retirement lifestyle. – The Senior List

Strategies to Reduce Your Tax Burden

US News & World Report offers several strategies for managing the tax burden on your retirement accounts. Here are a few;

• Remember required minimum distributions. Did you know that the penalty for missing a required distribution (withdrawal) is 50% of the amount that should have been withdrawn? Ouch!
• Avoid two distributions in the same year. Your first RMD is due by April 1 (of the year after you turn 70 1/2).
• Start withdrawals before you have to. “While you don’t have to begin traditional retirement account withdrawals until after age 70 1/2, taking smaller distributions beginning during your 60s spreads the tax bill over more years and could allow you to stay in a lower tax bracket and reduce your lifetime tax bill.”
• Donate your distribution to charity.  You can avoid paying income tax on IRA withdrawals by donating that distribution to a qualified charity.  You are able to donate up to $100K per year.

3 Key Ingredients

Don’t forget these 3 key ingredients when considering your retirement.  Plan, plan, and plan! Having a plan will enable you to avoid mistakes that can affect your finances – big time. For many, a certified financial planner can take the pressure off. It’s all part of a comprehensive plan to retire on your terms, without undue financial anxiety.