One wrong move can increase your retirement tax bill.
U.S. News & World Report
RETIREES WHO PLAN carefully can often pay a lower tax bill in retirement. However, tax mistakes can have a dramatic effect on your finances when you're on a fixed income. Poor or haphazard tax planning might actually move you into a higher tax bracket or result in you needlessly paying more taxes.
A first step might be to schedule a meeting or conference call with a financial advisor or tax advisor. "Tax planning is an ongoing process rather than a snapshot at the end of the year," says Jeffrey Corliss, executive director at RDM Financial Group in Westport, Connecticut. "It's better to know where you're headed sooner rather than later and not be surprised at the end of the year." Here are six tax tips that could save you money in retirement.
You May Be Able to Contribute to a 401(k)
If you continue to work, you may be eligible to save in a 401(k) for later on in retirement and defer paying income tax on that money. "Even though you are technically retired, you do have saving options," says Christine Russell, senior manager of retirement and annuities at TD Ameritrade. "If you are retired but your spouse is still working or you are still working part time, it is still possible to make Roth IRA contributions. It won't decrease taxable income today, but the growth will give you more income." Only those who are under age 70 1/2 and have earned income can make contributions to a traditional IRA, but you can contribute to a Roth IRA regardless of your age if you meet the other requirements for the account.
Reduce the Tax Burden on Your Heirs
When leaving money to loved ones, remember to think about the taxes that will be due on each type of inheritance. For example, your heirs will owe taxes on money left to them in a traditional IRA, but not funds from a Roth IRA. Glen Smith, managing partner of Glen D. Smith & Associates in Flower Mound, Texas, says he has a 90-year-old client with significantly appreciated assets, and if she cashed in those assets she would be hit with significant taxes. Suppose she bought Apple stock at $10 a share and today it is trading at $250 a share. If she sold the stock before it passed to her heirs, she would be hit with taxes based on how much that $10 stock appreciated. But if the heirs instead received the actual stock, they would pay taxes only on gains above the $250 a share price, or the stepped-up basis. "We saved the lady hundreds of thousands of dollars," Smith says.For more tips on how to lower your tax bills during retirement, continue reading here.
