As I approach retirement I find myself spending more and more time reading articles about retirement income, taxes, distributions and other related things.
I found the following items that may be of interest to others in the same boat:
Tax breaks for seniors with dependents – seniors may be able to take a tax break if they pay the majority of household expenses for grandchildren and others (even if not family members) and they are considered full time dependents.
Loans from your 401K – Taking a loan from your 401K is generally not a good move but can be made even worse if you don’t repay in time. If you take a loan and then leave your employer and don’t repay the loan amount within the agreed upon period your distribution will be considered taxable. And if you are under 59.5 you will also be subject to a 10% penalty.
Converting to a Roth account during retirement – If you want to pass some of your retirement money to your heirs tax free you can consider converting some of your traditional retirement accounts to Roth accounts. Your heirs will not have to pay taxes on these accounts once they inherit them.
Non-itemized deductions – A higher standard deduction of $1200 is available to married couples filing jointly above the standard deduction of $12,200 in 2013. If either you or your spouse is blind you qualify for an even higher deduction.
Lumping deductions – if you don’t have enough deductions to itemize every year it may make sense to defer medical and other expenses and lump them together into a single year where you can itemize the deductions for a tax advantage.
Retirement Asset Diversification – it may make sense to diversify the money you plan to use for retirement into different types of accounts before you retire. This may substantially reduce the taxes you pay.
The money that you use for retirement can be in taxable accounts, Roth accounts and traditional IRAs/401Ks.
Consulting a tax advisor may help determine how to setup the accounts and how to maximize withdrawals to minimize taxes.
The RMD (Required Minimum Distribution) – there are some quirks here to be aware of.
IRAs – you must begin to take the RMDs by April 1 of the year after you turn 70 1/2 and every year after that by December 31.
401k – you don’t have to take money out of your 401(k) until April 1 of the year after you retire even if you reach the age of 70 1/2.
Make sure you take the distribution when required because the penalty for failure to withdraw is 50% of the amount you were supposed to withdraw.
Setting up automatic withdrawals may make sense to avoid missing the deadline.
Another important point related to the required minimum distribution is that the government may require that you withdraw the amount annually but there is nothing that states that you can not re-invest the money in a taxable account to maintain a balanced portfolio. If you don’t need the RMD for your living expenses in any given year you can re-invest it.
Retirement location – if you are able and willing to relocate some States offer tax advantages for retirees. States including Florida, Georgia, Arizona, Alaska and others are tax friendly to those looking for low tax retirement locations. If you own homes in several States it may make sense to establish residency in the lowest taxed State to reduce your overall taxes but there may be actual minimum residency requirements in some of these States.
Another option may be to retire overseas to reduce or eliminate taxes. Retiring overseas may introduce other issues including language and culture differences, distance from family, etc.
Free tax assistance – Some may not be aware of this but the IRS sponsors free volunteer tax assistance programs to help low and moderate income seniors in the preparation of their tax returns and with any questions they may have.