4 Yearlong Tax Tips for Retirees

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals. 

Whether you’re just easing out of the workforce or you’ve been in retirement for a few years now, making the right financial moves is critical. If you’re working with an advisor or taking a look at your finances yourself, one central goal during retirement is protecting your wealth from unnecessary taxes. 

In many cases, there are ways to avoid owing more taxes - but usually, this requires proactive action beyond tax season. Below we’ll explain four tips you can utilize throughout the year to help minimize your tax obligations in retirement.

Tip #1: Take Your Required Minimum Distributions (RMDs)

An RMD is an amount that must be withdrawn from your retirement account. These required withdrawals begin when you, the retirement plan account owner, reach age 72. The rules apply to employer-sponsored retirement plans, traditional IRA plans and Roth 401(k) accounts, but they don’t apply to Roth IRAs when the account owner is still alive. 

Some IRA custodians and retirement plan administrators might find out what your RMD is for you, but the responsibility ultimately falls on you. To find out what your RMD is, the IRS provides life expectancy tables to utilize according to your circumstances. If you do not withdraw the RMD (or the correct amount), the amount not withdrawn will be taxed at 50 percent, which is why it’s critical to take your RMDs and withdraw the correct amount.¹ 

It’s important to note that as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, passed on March 27th, 2020, RMDs are not required for the remainder of 2020.²

Tip #2: Manage Your Income Combinations 

As a retiree, a portion of your income will likely come from Social Security. However, not all of your benefits are taxable, and there are ways to minimize or, at times, eliminate taxes on your Social Security benefits. 

If half of your Social Security benefits in addition to your other income is higher than the base amount for your status, your benefits will be taxable. By strategically managing all of your income sources (such as pension payments, dividends or part-time jobs), it’s possible to lower the portion of benefits that will be taxed. Rules regarding Social Security income taxes also vary from state to state, so always check with your state regulations to determine the best solution for you.³

Tip #3: Figure Out if You Need to Pay Quarterly Taxes (If Not, You May Decide to do it Anyway) 

If you don’t have taxes withheld automatically, you may need to pay estimated tax payments. Individuals who are expected to owe $1,000 or more - or those whose withholding and refundable credits are 1) less than 90 percent of the tax owed or 2) at least 100 percent of the tax on the previous year’s return - must pay estimated tax. 

In some cases, you might decide to pay quarterly taxes, even if you are not required to, in an effort to avoid the inconvenience of paying a large sum all at once. If you miss a payment or underpay, you may be charged a penalty.⁴

Tip #4: If You’re Moving to a New State, Get to Know Its Tax Laws

If you’re relocating to a new state during retirement, consider the impact of the move on your financial situation, as tax laws vary according to the state. For example, some states, like Florida and New Hampshire, don’t tax on income or only tax on dividends and interest.⁵ On the other hand, they may have higher property taxes. For example, New Hampshire’s property taxes are high compared to the rest of the country.⁶  In addition to nicer weather or a more serene lifestyle, you might decide to move to a new state in an effort to save on taxes. 

In many cases, an individual or couple is working with a fixed amount of wealth to last throughout retirement, which is why taking the right financial steps is essential. By working with an advisor and keeping these four tips in mind during the year, you can make sure you’re not paying more than you need to. When it comes time to finalize gifting to your children or grandchildren, you can further reduce taxes by incorporating other strategies, like charitable giving, into the equation. ⁷ 

Dream Financial Planning Process ™

Do you know how much you need to retire? The DREAM Financial Planning Process™ is tailored to the unique needs of retirees and those who are less than ten years away from retirement. This process will start with a discussion to learn about your goals, values, and what's most important you. The discussion will eventually transition to the best strategies to liquidate your retirement and brokerage accounts to replace your paycheck and sustain spending during retirement. This process will also focus on issues like the timing of taking social security benefits to maximize your benefit and the type of legacy you want to leave for your family.  

Throughout this process, we'll work in a collaborative fashion to uncover untapped opportunities, as well as discover gaps in your current strategy that could be preventing you from enjoying a long and fulfilling retirement.  If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.

Complimentary Consultation

With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.

Monthly Newsletter

On the first Thursday of every month I send out a monthly newsletter with tips and tricks to help you manage your Finances. In the July Newsletter I shared an article that discusses Regulation Best Interest vs. the Fiduciary Standard. I also included two downloadable PDFs. One highlights how to make sure your Health Savings Account (HSA) distributions are tax-free. The other provides guidance on if you should contribute to a Roth or Traditional IRA.

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