Tax mistakes in retirement can threaten financial security.
Saving for retirement is important.
We have all heard this, yes?
You need money to pay for bills, mortgages, food, and vacations.
Once you enter retirement comfortably, you may be less than careful with your finances.
According to a recent Money Talks News article titled “5 Tax Mistakes to Avoid in Retirement,” you cannot merely coast financially in retirement.
Ignorance or laziness can lead to making costly tax mistakes.
What are a few of these common mistakes to avoid?
Ending your retirement accounts contributions.
If you set aside money in your retirement account, it can grow through compounding interest and returns.
Although there was formerly an upper age limit for contributing to your traditional IRA, this rule was eliminated in the SECURE Act.
If you work or your spouse works, you will be able to continue contributing to your account.
This can lower your taxable income.
Failing to plan for RMDs.
Traditional IRAs have required minimum distributions.
After all, the government wants to be paid those deferred taxes eventually.
These withdrawals are mandated to begin the year you turn 72.
This year and every year after, you will be required to withdraw a specific amount of money from your IRA.
With these withdrawals, your income may increase significantly, resulting a larger tax bill.
Not accounting for this income can drain your retirement income more quickly.
Making charitable contributions can offset these income tax mistakes.
Forgetting the taxes on Social Security.
Depending on your income level, your Social Security benefit may be taxed.
How can you reduce your income?
Certain tax deductions and working less in retirement can certainly help.
If you need more time to plan how to avoid tax mistakes with Social Security, you can delay claiming these benefits.
Not using a health savings account.
A health saving account (HSA) can help you in two ways, if you are eligible.
With an HSA, you can contribute pre-tax money and make withdrawals tax-free for qualified medical expenses.
Not taking advantage of an HSA is a significant tax mistake because it allows you to pay for healthcare costs tax-free in retirement.
Although you will owe taxes on non-qualified withdraws, the HSA can also provide backup income in addition to your IRA.
Having no tax strategy in retirement.
One of the biggest tax mistakes you can make is having no tax plan.
Consider all income streams in retirement.
These include HSAs, Social Security, IRAs, and other investments.
Think carefully about how to most efficiently use (or not use) each of these sources of income.
Include the retirement accounts of your spouse in your planning.
Being proactive will allow you to avoid costly retirement tax mistakes.
Reference: Money Talks News (Jan. 25, 2021) “5 Tax Mistakes to Avoid in Retirement”