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4 Yearlong Tax Tips for Retirees

4 Yearlong Tax Tips for Retirees

August 01, 2022

Are you recently retired? Have you been enjoying retirement for years now? If so, making the right financial moves is critical. One of the biggest risks you will face in retirement is taxation. Once you retire, the tax game completely changes. Of course, there are taxes we cannot avoid but most definitely there are taxes that we call avoidable taxes. One central goal during retirement is protecting your wealth from avoidable taxes. 

Many of the avoidable taxes in retirement are just that - avoidable. But usually, this requires proactive forward-looking tax planning beyond what you do during tax season or what your CPA does for you. 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)

As the name implies, an RMD is an amount the federal government dictates must be withdrawn from your retirement account after years of tax deferral. These required withdrawals begin when you, the account owner, reach age 72. This rule applies to employer-sponsored retirement plans, traditional IRA's and Roth 401(k) accounts, but they don’t apply to Roth IRAs when the account owner is still alive. 

Some IRA custodians and retirement plan administrators calculate what your RMD is on your behalf, but the responsibility is ultimately yours. To find out what your RMD is, the IRS provides life expectancy tables to utilize according to your circumstances. 

 One of the single largest penalties in the entire tax code

Do you know what the penalty for failing to withdraw your RMD is? It is one of the single largest penalties in the entire tax code. If you fail to withdraw your RMD or fail to withdraw the entire amount that should have been withdrawn, the amount not withdrawn will be taxed at 50 percent. This makes it critical to take your RMDs and withdraw the correct amount.

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. 

By strategically managing all of your income sources (such as pension payments, dividends, or part-time jobs), it’s possible to lower the portion of benefits that will be unnecessarily taxed. Rules regarding Social Security income taxes also vary from state to state, so always check with your state 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 tax. 

You might decide to pay quarterly taxes, even if you are not required to. This is all 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 part of your retirement plan is to relocate,  consider the impact of the move on your financial situation, as every state has its own tax laws. For example, some states, like Florida and New Hampshire, have a zero income tax rate meaning you don't have to pay any state taxes on income. Other states only tax dividends and interest.4 Although the income taxes are lower, property taxes may be higher. For example, New Hampshire’s property taxes are high compared to the rest of the country.5  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. 

Most people are working with a fixed amount of money in retirement and the money is not only for the beginning years, but it has to last all the way through retirement. Taking the right steps financially, to plan for things like taxes is essential. By working with an advisor you can be sure to make sure you are planning for these challenges throughout the year and keeping up with any changes that come along. The goal is always to make sure  you’re not paying more than you need to and avoid those "avoidable taxes."  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.6 

If you would like to discuss your current situation schedule a free 20-minute call with the link below.

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About the Author

James M. Comblo, CFF
is the President & CEO of FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients live the life they want, not the life they are forced to. To learn more about him click here.