If you're retired or about to retire, think carefully about your tax strategy
Coming up with the best tax strategy in retirement can be much trickier than it seems, and tax pros agree that it is a time when people need to be especially careful
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.Coming up with the best tax strategy in retirement can be much trickier than it seems, and tax pros agree it's a time when people need to be especially careful to look at their entire financial picture before deciding on a things like 401(k) withdrawal amounts and timing, or when to begin taking Social Security.
“It’s the biggest change in life other than death. Don’t be so quick about deciding when to take Social Security benefits or 401 benefits. Talk to a tax professional before you make these decisions to avoid surprises. It may save you a lot in tax dollars,” says Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.
Withdrawing a large amount to do something like pay off a mortgage could result in a dramatic increase in what percentage of your Social Security benefits will be taxed, for example.
“A $20,000 capital gain might cause an equal amount of Social Security income to be taxable. Capital gains can also have impact on the other parts of your tax return,” O’Saben says.
“Some people take a large distribution from their 401(k) to pay off the house, for example. Well, now you’ve raised your income bracket and you’ll have 85% of your Social Security that’s taxable,” he points out.
Withdrawing from a retirement account too soon could also result in hefty penalties or a surprise in taxes owed.
And taking Social Security benefits earlier than needed could result in receiving a lot less every month than if you’d waited until the maximum age of 70.
On the upside, it’s not too late for taxpayers 50 and older to make catch-up contributions to their traditional or Roth IRA for tax year 2023. Catch-up contributions to an IRA are due by the due date of your tax return (return extensions are not included).
Taxpayers about to retire can still make this catch-up contribution, which may increase their retirement benefits and decrease their taxable income for 2023, said Kathy Pickering, chief tax officer at H&R Block.
___
Find more of AP’s tax season coverage here: https://apnews.com/hub/personal-finance
Subscribe to Independent Premium to bookmark this article
Want to bookmark your favourite articles and stories to read or reference later? Start your Independent Premium subscription today.