Retirement Tax Planning 2017: Tips for This Year and Beyond

Tis the season… tax season that is.  And, as you transition into retirement and live in leisure, a lot changes and continues to change, especially in the realm of taxes. Retirement tax planning 2017 is critical whether you are retired already or just thinking about it.

retirement tax planning 2017

While you will probably spend less on taxes in retirement than ever before, minimizing what you pay to the government means more money to spend on what is really important to you.

Here are a few tips to help you with retirement tax planning 2017 and beyond.

A Slightly Different Tax Deadline for 2017

Did you know that you get 3 extra days for taxes this year?  This year April 15 is a Saturday and the following Monday is a holiday in Washington D.C.  So, tax day falls on Tuesday, April 18, 2017. That’s the deadline for filing taxes on income earned in 2016.

Are You Older than 70 1/2 and Still Working? Do a Reverse Rollover…

According to Pew Research, Americans over 70 are working at higher rates than ever before.  If this is you, then you might benefit from a reverse rollover.

A reverse rollover — transferring funds from an IRA into your company 401k or 403b program — is an interesting tax strategy if you:

  • Are over 70 1/2 and have money in an IRA account that will be subject to Required Minimum Distributions
  • Do not NEED or want to withdraw funds from your IRA accounts
  • Have access to a 401k or 403b program where you are currently working

Learn more about other ways to reduce the impact of RMDs.

Have Income?  Make it Nontaxable

If you are not yet retired, you certainly have income from work.  Already retired?  You may have taxable income from withdrawals, passive investments and more.

No matter your retirement status, retirement tax planning often means keeping your taxable income under certain thresholds.  To do this, you can take “deductions.”  Deductions are a way to turn taxable income into nontaxable income.

Here are a few ways to make your retirement income nontaxable:

Add to Retirement Savings: So long as your income is below a certain threshold, any money you put into a 401k, 403b or IRA (a traditional IRA, not a Roth IRA) will not be taxed.  For 2017, you can contribute up to

  • $18,000 into a 401(k) or up to $5,500 into an IRA
  • If you’re aged 50 or older, the maximums go up to $24,000 and $6,500, respectively.

Put Money in a Health Savings Account (HSA): Funding healthcare is expensive.  However, you can make your spending a little more efficient by utilizing an HSA.  Money you put in an HSA is deductible up to $3,400 for individuals and $6,750 for families in 2017.  Besides the savings being non taxable, distributions from the HSA are also tax free when they are used to pay medical expenses.

The One Advantage of Debt: If you itemize your deductions, then the interest you pay on some debts —  mortgages, student loans and more — is deductible.

The One Advantage of State Taxes: Like debt, state and local taxes can be deducted if you itemize.

Give a Little, Get a Little: Charitable contributions of up to 50% of your adjusted gross income are also deductible if you itemize and give to a qualified charity. Your donation can be in the form of money or property.

Watch Out for Lump Sum Benefits

If you are planning on getting a lump sum payment from a pension or other source, you could be facing a big tax headache.  The company paying your benefit is required — by law — to withhold 20% of the money for taxes.  (You can likely recover the taxes, but it is complicated and the lump sum distribution can trigger all kind of annoyances and the very real possibility of penalties.)

You may be able to avoid the problem if you ask your employer to deposit your pension directly into a rollover IRA.  The check can not be made out to you, it must be transferred directly into the IRA account.

Stay Flexible

After a couple of decades of working, you will most likely have several different account types, which may include a brokerage account, a traditional tax-deferred account like an Independent Retirement Account (IRA) or a 401(k) and a Roth IRA in which you can withdraw tax-free, explains Pamela Kornblatt, president of Tax Strategist, LTD, based in New York City.

“Conventional wisdom holds that you should start by drawing on the taxable assets and then move next to the tax deferred vehicles, saving the Roth, which is tax-free, for last,” Kornblatt says. “However it may not necessarily be advantageous to strictly follow this order, and it is in fact ideal to keep assets in each type of account to be able to tap into them throughout your lifetime.”

It’s a good idea to make sure you maintain assets in each of the three types of accounts, Kornblatt explains. “This allows for added flexibility to both help lower your overall tax burden and also spread taxes out over time so you don’t have to pay them all out at once,” she says.

Roth Conversions

There are two types of IRAs and 401ks — traditional accounts and Roth accounts.

  • In a traditional retirement account, you save the money tax free and then pay taxes when you withdraw the money.
  • In a Roth account, you pay taxes when you save the money and withdrawals are tax free.

You can rollover from one kind of account to the other and doing so can help you save on taxes.  When to do a conversion will depend on your current and future tax bracket, your time horizon, your estate plan, whether or not you can afford to pay taxes on a conversion and more.

Just Retired? Retiring Soon? You Need to Take More Control Over Taxes

A lot of retirees pay their taxes quarterly. When you leave the workforce, you may have to estimate your income and pay quarterly taxes ahead of the April deadline when most American have to file. This is because you are no longer paying federal taxes as you would while you are still in the workforce, which is typically taken right out of your paycheck.

Once you start tapping into your retirement accounts, Social Security benefits or pension, you will have to start submitting your estimated payments. You won’t have to pay estimated taxes on a quarterly basis if you opt to have taxes withheld from these income sources.

If you’re paying estimated tax, you are required to submit the final payment for 2015 on January 15. The first deadline for quarterly taxes in 2016 is April 18, also the federal tax filing deadline. Sequential quarterly tax deadlines for the rest of the year fall on June 15 and September 15.

Working for Yourself?  Try This

Many retirees start their own businesses.  If this is you, did you know that you can deduct the premiums you pay for Medicare Part B and Part D plus the costs of supplemental Medicare or Medicare Advantage?

Be Mindful of Fees

Every investment firm wants to extract some of your money, and they have various means of getting to it, some with the small print, others with front or back loads, and the majority with an annual take on either returns or total assets or both.

As you move money around to try to avoid taxes, pay attention to these potential fees.  For many, this is more important than seeking lower taxes.

Consider Your Overall Retirement Plan as Well as Your Estate Plan

While minimizing your taxes this year and next is useful, you also want to think long term.

Estate Planning: If you plan on leaving any kind of estate, you will want to make sure you are taking advantage of the many different strategies that can preserve your wealth, reduce the tax burden on your heirs and strengthen your overall finances.

CPAs, financial advisors and lawyers can all help you strengthen your estate plan in a way that reduces your and your family’s tax burden.

Retirement Planning: Minimizing how much you spend on taxes is only one aspect of your retirement financial plan.  Taxes are annoying, but it is important for you to evaluate all aspects of your saving, spending and earning.

Consider using a retirement calculator that helps you plan for all aspects of your retirement.  Figure out what you want to spend for retirement happiness, how those expenses will change overtime and then find the best retirement strategies for making your dreams come true.

Seek Professional Help

The costs of hiring professional help — a Certified Financial Planner, CPA or lawyer are small compared to the potential gains to your overall wealth.

Ask professionals for comments on your retirement plan, securities, insurance and estate planning. A CFP not only has a good financial background, but he or she is more up-to-date, is more familiar with secure alternatives, acquainted with the multifaceted aspects of taxes, knows when it is more advantageous to make conversions, how to minimize estate taxes and so on. Get matched to a qualified advisor today.

Ready to work on your overall retirement plan?


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