5 Things Retirees Need to Know About Income Taxes

Filed under: Financial tips, Retirement

Couple discussing home economicsOnce you retire, many parts of your life will change. Hopefully, all of these changes are for the better! But we have discovered a few things that tend to take retirees by surprise, particularly with regard to income taxes. So keep these things in mind as you transition into retirement and begin taking distributions from your retirement accounts.

Don’t wait too long for your first retirement distribution. Many retirees hope to wait as long as possible to take the first distribution from their retirement account, which can be a smart plan since this allows your money more time to potentially grow. However, if you wait beyond age 70 ½, the IRS will impose a hefty penalty of 50 percent of the amount you should have withdrawn.

Avoid taking your first distribution too early. On the flip side of that situation, some people want or need to take their first distribution much earlier than usual. If you withdraw money from your retirement account before age 59 ½, you will usually be charged a 10 percent penalty. That penalty won’t apply, though, if you were forced to retire early due to disability, or you needed the money to pay for medical expenses in excess of 7.5 percent of your annual income.

Be careful about income taxes if one spouse continues working. If one spouse continues to work, this can throw off your tax situation just a bit. Be sure to fill out W-4 forms correctly, or withholding throughout the year might not be adequate.

Make sure healthcare subsidies are calculated correctly. Let’s say you want (or need) to retire before age 65, when you’ll be eligible for Medicare. What will you do about health insurance? One option is to access the health insurance plans, and subsidies to help with premiums, available through state or federal healthcare exchanges. However, if your income isn’t carefully estimated when calculating your subsidy, you could owe the difference to the government when you file your taxes the following year.

Keep your eyes open for tax credits and deductions. When your life situation changes, so do your taxes. Deductions and credits are more important now than ever, so continue working with a skilled tax professional who can help you identify all of the tax breaks available to you.

Keep meeting with us even after you retire. We can help you anticipate all of the changes retirement will bring, and make a plan for them ahead of time so that (hopefully) nothing takes you by surprise.

If you would like more information or have specific questions, please contact us using the following form. We would be happy to assist you.

This information has been provided by a licensed insurance professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting the insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax, trust and estate, or investment advice. Infinite Wealth Advisors is not an investment advisory firm.  Investment Advisory Services provided by NAMCOA® – Naples Asset Management Company®, LLC, a federally registered investment advisor, website: www.NAMCOA.com .