You worked hard over the years, planning and getting ready for the life of a retiree. Before you retire, you might want to make sure you don’t fall victim to these six tax mistakes that can destroy your chances of financial independence and a comfortable retirement.
Mistake #1: Retirement Means Fewer Taxes
Unfortunately, the Internal Revenue Service (IRS) still wants a piece of your retirement, and most people are not prepared. The idea of falling into a lower tax bracket and paying fewer taxes, doesn’t happen immediately. In order to achieve this, retirees need to lower their income and standard of living.
Mistake #2: Not Correctly Planning For Social Security Taxation
The IRS uses provisional income, which can include your IRA or 401(k) accounts to determine if your social security benefits will get taxed. If the total income is more than $34,000 for a single person or $44,000 for a married couple filing jointly, 85% of your Social Security benefits will be taxed.
Mistake #3: Ignoring Your Roth IRA’s and Roth 401(k)s
While maxing out your Roth IRA’s and Roth 401(k)s accounts is a good idea, it just isn’t is enough to give you financial independence. Some employers will offer a Roth 401(k) with an $18,500 limit, as part of your employee benefits package. Also, some married couples will not qualify for a Roth IRA, because they make too much.
A Roth IRA and a traditional IRA or 401(k) can give you the opportunity to diversify your tax rate risk, and it allows you to make free withdrawals from the Roth and less from the 401(k), which is taxed if you should have higher income or taxes.
Mistake #4: Forgetting Taxes All Together
Often when people look at a retirement calculator or projection, they see a number and automatically say, “ It looks good to me,” but what they forget is that figure is before taxes. If you are several years from retirement, this problem can be fixed. If you have retired, it will be much harder for you to make up the difference. Also, federal taxes for those who have big retirement nest eggs can be high.
Mistake #5: No Strategic Tax Planning To Reduce Taxes
For people who depend on Social Security, there is very little planning required. For others you want to protect every penny they earned, having a clear, strategic tax plan can help you put more money in your pocket and less in Uncle Sam’s.
Mistake #6: Withdrawing From A Retirement Account In The Wrong Way
If you deplete your post-tax investment accounts first, you could be left with fewer options to minimize taxes. Once post-tax money is gone, your entire retirement income will get taxed.
Taxes are complex, and if not done correctly, it can have a crucial impact on your retirement. Be proactive, and don’t forget about taxes and the role they play in your financial security.