2/6/2012 9:59 AM ET|
Retired? How to cut your taxes
Retirees can face hefty taxation if they don't follow certain strategies when managing their money. Using these tactics will help lower the bill.
As many seniors learn, retirement can be as stressful and frustrating a time as any when it comes to paying taxes. With 401ks and traditional and Roth IRAs, as well as Social Security benefits and working wages, there's plenty to calculate on a tax return.
So how can the retirement crowd cut down on their tax bills? Analysts say it starts with managing your money.
"Retirees usually have a bit more control over their tax situation than other taxpayers," says Steven Gershon, a director at the Kansas City, Kan., office of the accounting and financial services firm CBIZ MHM. "That's because they can decide how much they might need to withdraw from their retirement plans to keep their taxes low."
Delay, delay, delay
Most experts agree that delaying withdrawals from a 401k or traditional IRA until you are 70½ is best for taxpayers because it lets these plans grow tax-deferred. Taxes on withdrawals from these plans are eventually taxed at ordinary income rates, but that can increase by more than 10% if withdrawals occur before age 59 1/2.
This is where a Roth IRA can help, says Mike Scholz, the tax director at Wegner CPA. Funds in a Roth can be withdrawn by age 59 when needed, tax-free, if the account has been open for at least five years.
"If a retiree doesn't have a current Roth IRA, it's worth it to see if a rollover from an existing IRA or employer plan to one makes sense," Scholz says. "They have tax-free growth and tax-free distributions."
And having more than one type of IRA can help taxpayers when the required minimum distributions for these funds hit at age 70.
"RMD management is essential," says Lee Martinson, the owner of PGA Financial. "Seniors have to know to take advantage of the aggregate rule, which says that withdrawals from one can satisfy withdrawals from all your vehicles. That will lower tax bills."
One other tactic to lower taxes is to shift taxable income around to different types of lesser-taxed investment vehicles.
"Some methods are very popular, like family limited partnerships and things like trust life insurance annuities," says Alexey Bulankov, a financial planner at McCarthy Asset Management. "There are what's called Stretch IRA's to deal with estate taxes. Seniors should weigh the benefits of all."
Besides moving money, some retirees may consider moving to states like Nevada and Florida that traditionally have low or no income taxes. But Gary Duboff, the managing director of CBIZ MHM's New York City office, notes that "with the economic downturn, many states are enacting or thinking about new and higher taxes on residents. It's a common approach for many retirees to move, but unexpected changes in tax law could have an impact on planning."
Another problem for retirees on the move are gift and estate taxes. Many states -- 21 to be exact -- have not adopted federal rules excluding up to $5 million of estate tax assets. That could cost retirees and their heirs additional taxes if they relocate.
It's obvious, experts say, that retirees need to check out the tax laws of any new state they might want to move to.
More from CNBC.com:
VIDEO ON MSN MONEY
They all ignore the marriage penalty for retirees. The old geezer deduction is less for a married couple than for singles. The worst is the MASSIVE marriage penalty in the tax on Social Security benefits.
If my wife & I got a divorce & lived together we would pay ZERO on our Social Security.
As it is we pay on over $5000 & it would be much worse if we went into the 85% bracket
which also hits sooner for married people.
Singles pay after $25,000 & $9,000 more for the 85% bracket.
Married pay after $32,000 & $12,000 more for the 85% bracket.
Worse yet these figures have never been adjusted for inflation since this law started.
We pay about $600 a year for being married. It would go much higher for people that make more. It is pure insanity to tax people for being married.
I just retired. I had my own Concrete company and had 15 employees. Do you know how much money I paid into Social Security ?????? Over Three Million Dollars, I paid mine and I had to match all of my Employees plus 2.9%. Now I get to collect and Guess What, I AM TAXED ON MY SOCIAL SECURITY. Makes me Mad, Taxing me on a Tax that I paid into.
Is That GOOFY or What It make me want to Cry It just Breaks my I can't even go and have a cold without getting taxed. The has taken over our Great Country
Yes you get a one time tax when you rollover a Traditional IRA to a ROTH, however, that is because all that money wasnt taxed when it was originally put into a tax deferred acount. The point of rolliing over a large amount of retirement savings from tax deferred to tax free Roth is that the Roth will grow for the rest of your life tax free and then all distributions will be tax free. Roth is a superior savings program in many aspects, unless of course you are already within a few years of retiring. IRA are more benefitial in the long term, so if you are figuring it out now that you should have been saving 30 years ago, no need to complain in forums.
to pay what taxes they owe and we allow this to continue by re electing them. I would like to know of a company that I can go to work for that will tolerate my voting myself a pay raise as needed and paid retirement with lifetime medical benefits. Oh yes, I would also like to add in per diem, at rates that I determine to be fair, and then add in a company car, personal jet, or any other item I deem necessary. What I know....is that if there were a company that would allow that, it wouldn't be in business for long. Well folks, that is what our government officials have done. oh yea, when the coffers run a little low, raise taxes or maybe nudge your buddy to raise interest rates, and all is well!!!!!! I am so sick and tired of working my tail to the bone, and paying out the a$$ for them to live like kings. it's backwards. They work for us, REMEMBER? well, they turned the tables on us folks, and now we slave for them...and like I said, we allow it. because even though I don't EVER vote incumbent, it doesn't matter, because someone else keeps re electing these bums. or, the "parties" throw more bums out there for us to elect that will milk the system just like the one that just retired. Our great Country has gone down the crapper because of greedy self serving politicians, and we keep feeding the pig. Problem is, there are fewer and fewer places to go where it isn't just as bad. very depressed and very tired of it all.
The article is entitled "Retired? How to cut your Taxes." Thank you for proving my point.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.