If you have retired recently or your retirement is just around the corner, you must keep yourself abreast of the substantial tax implications it entails.
Apart from diversification in your investments to reap the maximum benefits, you must also plan for a better tax outcome.
To properly manage your retirement taxes you need to look at not only your retirement savings but also non-retirement investments, pensions, and Social Security.
You must also consider a potential change in tax rates during retirement and the tax implications of living in some states compared to others.
Here are three vital tips to help you prepare in advance and avoid mistakes that might prove damaging to your retirement savings.
Delay taking taxable Social Security income
Although you can collect your Social Security when you turn 62, deferring it could prove to be the better decision in terms of its financial benefits for you.
The more you hold it off, the greater the monthly benefits that will accrue. Note, however that your income from Social Security can be taxable based on your overall annual income.
Your tax liability could be an issue, for instance, if you start collecting Social Security while taking distributions from your other retirement accounts, or if you are still earning work come.
The strategic decision regarding the retirement income is planning which you will dip into first to cut down on your overall tax liability. That will require planning ahead.
Research eligibility for tax credits and deductions
When you turn 65 there is an increase in your standard deduction by $1,600 that can save you money as it lowers your taxable income.
Similarly, if you file a joint return with your spouse when they turn 65 you enjoy an increase of $1,300 in your standard deduction. Thus your combined standard deduction at 65 increases by $2,600.
At 65 years of age, you also may be eligible for an elderly or disabled credit if you file jointly with your spouse.
This credit is worth between $3,750 and $7,500 depending upon the qualifying limits you meet. There are separate limits for non-taxable Social Security income (between $3,750 to $7,500) and your AGI ($12,500 to $25,000).
Use interactive tools on the IRS website to find out the requirements and to see if you qualify.
Prepare for required minimum distributions
You will need your required minimum distributions (RMDs) out of your non-Roth retirement accounts once you reach the age of 72. Your taxable income can increase from the distributions, impacting your overall tax amount, so it may be better to take from these account earlier, before you begin taking Social Security.
You must take your first required minimum distribution by April 1st of the year after you are 72 and distributions in succeeding years by December 31. If you fail to do so you will be liable to pay a 50 percent penalty.
Use online RMD calculators to work out what the amount of withdrawal should be or ask your brokerage or retirement plan to inform you of the amount each year.