Tax Tips in Retirement

Written by Sally Perkins

Many retirees may assume that they don’t have to pay as much income taxes since they don’t work. Though a single or married retiree may be in a lower tax bracket, certain retirement vehicles are still taxable. In fact, you may have to pay taxes on social security if you are in higher tax bracket. But if you plan ahead and learn the tricks of how to manage your taxes, you can be prepared for that dream trip to Europe or the extra indulgence you’ve been hoping for. So when tax planning year to year, consider the following:

Manage Your Expenses

It has been said before, but managing your expenses is a key element to a successful financial retirement. If you can keep your adjusted gross income below $37,500 in 2017 your tax burden will only be 15%. So try your best to avoid a higher tax bracket when you are withdrawing from any of your savings accounts, IRAs, 401(k)s, etc. Follow a budget, a retirement income strategy, and how you are going to pay for potential healthcare costs.

If you are considering retiring, try to have your house paid off as you can then avoid using retirement money for this expense.

Life Insurance Legacy

If you want to leave a legacy or if your dependents may have debts to pay on your estate, consider a life insurance policy. The death benefits and payout are not taxable. However, if you borrow against the policy you may be subject to taxes.

Withdrawal Strategy

Some retirement income is taxable. As mentioned earlier, social security is taxable if you are in a higher tax bracket. But, for example, if you are withdrawing money from a Roth IRA it isn’t taxable if you contributed the money over 5 years ago. The general advice given by many financial planners is to withdraw money from your retirement income in the following steps:

  • Taxable accounts, like investments
  • Tax deferred accounts, traditional 401 (k)
  • Tax exempt accounts, Roth IRA

The idea behind this tiered strategy is 401(k)s and Roth IRAs can continue to grow without any tax penalties. In your investment accounts there is no tax shelter, so you might as well use investment money first. Then, if you are going to have a year where your expenses are going to increase, use the tax exempt money so you won’t have to pay income tax on the withdrawal.

This is an important concept and may be worth talking to a financial planner about.

Annuities

Annuities have a tax benefit as well. Annuities are an insurance product where the individual purchases an investment and the price paid is converted into periodic payments to the retiree. There is a lot of flexibility on how often you get paid (monthly, quarterly, annually), when payments start to occur, how long you want the payments for, etc. Setting up a payment plan can take out some of the guess work.

If you have to cash out the annuity because of an emergency, you will have to pay income taxes on all earnings. But if you hold onto the annuity and paid for it with pretax money, then the payments will be taxable. If you use after tax income to buy the annuity, then you will only be taxed on the earnings.

Deductions

Of course all taxpayers want deductions! Individuals over 65 used to be able to itemize for medical expenses that were over 10% of their adjusted gross income, but that changed in 2017 to 7.5%. Keep this in mind when it comes to tax time, but stay organized and track your medical payments as you never know when your medical expenses will be high. Medical expenses include health and long term care premiums, dental care, prescriptions drugs and other health care expenses.

Another deduction that some people miss is dividends from investment income which are taxed lower than regular income, and you can still invest as a retiree. If you still run a business, even part time, your business expenses are deductions. Downsizing houses can be attractive and if you sell your home and you’ve lived in your home at least two of the five years before you sell the property, the equity won’t be taxed.

And if you are considering selling and moving…

Tax Free States

Florida may be infamous for having many retirees, and for good reason, there is no state income tax. There is also no state income tax in Nevada and Texas. The weather is warm in all three! So though there may be an expense to moving, you could recoup that by saving on taxes. If you are considering moving to warmer climates, look into these states and research the cost of living.

Finally, with a little strategic planning, you won’t be giving all your hard earned retirement income to the IRS. Have a budget, try not to have a mortgage, plan how you are going to withdraw income, look at different income vehicles, and consider your tax deductions. It will be worth the time investment to carefully plan your income streams.

5 Skills You Will Need in Retirement

Just because you make it to your second act does not mean you will necessarily enjoy smooth sailing ahead. Sure you have worked your butt off for years and years but the work is not over. Get ready to face plenty of challenges over the coming decades including numerous bumps in the road and a fair share of sudden detours not foreseen when you meticulously planned your future.

As with many facets of life, a happy retirement is best insured when certain skills exist and can be called upon as needed. You cannot prepare for every contingency but it never hurts to be armed and ready.

Here are 5 important skills/talents to add to your retirement arsenal.

Juggler

Not as found at the circus but rather the handy ability to manage multiple distractions at once. Although living the life of a retiree removes the need to balance the vicissitudes of the job there will be plenty new scenarios that leave your running around like a chicken with its head cut off. The fact is more often than not retirees find themselves busier in retirement than before. With only 24 hours in the day how do you fit in all those wonderful activities and interests you have postponed until now? I admit one of my biggest fears prior to retiring was running out of things to keep me busy and engaged. While I do occasionally have a slow day more often I can be found late in the afternoon wondering where the time went. Getting everything in – workouts, hikes, gardening, reading, playing ball with the dog (at least 5 times a day or he is perturbed), piano time, miscellaneous odd jobs, an afternoon nap, etc. – truly can feel like a three ring circus.

Discoverer of Creative Outlets

Without a job to monopolize your hours you become responsible for filling your daily dance card with activities and meaningful moments. Those most successful are able to step outside of previously restrictive comfort zones. The fact you have not tried something new in the past ten years need not taint your future. Now that you can why not give it a try? Experiment with a bit of this, try your hand at a little that. Don’t let preconceived notions and self-imposed limitations hold you back. Living the retirement you dream is all about doing what you want with your enviable free time.

fishermen at sunrise

Once retired, even if with your spouse, you will find you have time alone. This can be difficult if you thirst for social interaction but rather nice if you are fine with a little solitude. Knowing a bit about you – likes, dislikes, passions, never-in-this-life to be avoided situations, dreams, ambitions – can make the transition easier. Take time to feel your way around. You might discover you like those quiet moments alone with your own thoughts free from distraction or time constraints.

Bean Counter

Living on a budget is generally a reality of retirement. If you cannot increase the money coming in you need to manage what goes out. Successfully managing this ongoing balancing act helps keep you financially liquid through the coming decades. Beware big dollar investments in unnecessary items. Shop around for the best price. I rarely make a purchase online without comparing prices on Amazon.com. With competitive prices and free shipping Mr. Bezos is hard to beat. When paying for a service such as cable it helps to put in a call every six months or so to see if you can get a better deal. And don’t forget neighbors and friends who are happy to share their experiences and advice regarding cost saving strategies.

Best Deal Scrounger

One of the best parts of retirement is no longer waiting for weekends to have fun. Since you can now pursue your passions during the week a whole new world of deals is available. Hotel room rates are typically best Sunday through Thursdays – keep your eyes open for buy one get one night free or similar specials. Plane fares can be whittled down when you have the freedom to depart and arrive on the most economical dates offered. Early dinner fares are much more reasonable and since you control the calendar why not take advantage. It really pays off to shop around. Here is a helpful site I discovered specializing in various savings vehicles including a recent Retail Savings Guide for Baby Boomers.

Explorer of Passions

Not everyone retiring has a passion(s) to pursue. Or maybe it is more like they have not yet discovered what truly lights their fire. It could be they have just not had sufficient free time to think about what they really want to be doing. It’s difficult to find one’s passion when every waking moment is focused on climbing the corporate ladder or just keeping your head above water. But wouldn’t it be nice to have a passion to pursue when you retire? Now that you can wouldn’t you like to spend your time doing what really matters to you, what really lights your fire?

The secret is to find that inspiration. I don’t think there is any simple recipe to uncover what you are most passionate about. Each of us has to pursue our own path. For me it was a matter of trial and error. I tried out a few interesting avenues, quickly abandoning a bunch, giving up on others a little later. But in the end I identified a handful of activities/pursuits that bring meaning and happiness to my retirement. Armed with those I look forward to each day. And who says I am limited to what excites me today? I am free to try my hand at whatever may intrigue me as I continue my journey.

LoveBeingRetired.com