Tax Tips For Retirees
One wrong move can
increase your retirement tax bill.
U.S. News &
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
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)
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
, but you can contribute to a Roth IRA
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.