Understanding Retirement and Your Taxes

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As we get older, our budgeting and financial habits mean more than storing a few pennies in a piggy bank. Staying on top of your saving goals and intentions can make or break your future and the future of those you love most.

Understanding taxes, as confusing as they are, and what they mean to you can guarantee a financially secure future. Here are a few tax tips to consider after retirement.



To best understand the importance of properly managing your taxes during retirement, we spoke with Ahmed Al-Beheary, CEO and principal accountant at FIC Tax and Accounting, a financial solutions-based company. We also consulted tax preparation companies, such as TurboTax and H&R Block, and the IRS.

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Plan ahead

Retirement is a big step. Choosing to leave the workforce impacts your income status, investments and, inevitably, how you will file your taxes. To best prepare for life after retirement, plan as far ahead as possible. "If you're going to your accountant and saying, 'Hey, I'm about to retire,' you're too late," Al-Beheary said. "Don't wait until the last minute. Start as early as 10 years ahead of when you'd like to make that transition."


Find an accountant that works for you

Filing your taxes, whether you're retiring or just landing your first gig, can be a complicated process if you don't know the right steps to take. An accountant can help you take the appropriate legal steps to make the most of your tax return and feel secure in your retirement. "When you make the decision to retire, prepare a list of intelligent questions and find an accountant to assist you," Al-Beheary said. "If you're not getting the answers you need, you need to find a new accountant. And if you do have an accountant, but you can't call them urgently when trouble arises,  then you need to find an accountant that exists outside of the three tax months of the year."


Be honest with your accountant about your retirement plans

The key to having a financially successful retirement is to be as open and honest with your accountant as possible. "Do not think that anything is too little or too big," Al-Beheary said. "Tell your accountant everything and worry about the technicalities later. Come prepared with your paperwork, a list of all sources of income and any investments you might have. The more they know, the better they can help you."


Not all retirees have to file taxes, find out if you do

Unbeknownst to many, not all retirees have to file taxes. According to TurboTax, if your Social Security benefits are your only source of income, then your gross income is equivalent to $0. In this case, you wouldn't have to file a tax return. However, if you are married and live with your spouse but are filing separately, 85% of your Social Security benefits are considered gross income. Understanding whether you need to file taxes can save you extra money and, in the case you aren't eligible to not file, prevent you from being pursued by the IRS.

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Be wary of scams

Individuals pretending to be government officials working for the IRS might give you a call warning that you owe a serious amount of money. The truth is that they plan to drain as much money from your retirement savings as possible. Don't fall for these scams. The Federal Trade Commission (FTC) announced that there were more than 166,000 reports of Social Security scams in 2018 with a median of $1,500 lost per person. According to the IRS, government officials with the IRS will never contact you through email, text message or social media to collect financial information. If you're worried about past debts after retirement, contact your accountant for immediate assistance.


Consider a Roth IRA

Al-Beheary said every financial case is "unique and different." But if a retiree wants the biggest bang for their buck, a Roth IRA is the way to go. A traditional IRA, an individual retirement account, stores pre-tax funds for later distribution into a secure account. When that money is eventually drawn after retirement, you pay taxes on the money that hasn't yet been taxed, according to H&R Block. Roth IRAs are a bit different. Roth IRAs have a five-year rule, meaning your cash amount must remain in your account for five years before you can withdraw it, tax free. Traditional IRAs can be converted to Roth IRAs, and after paying taxes on the conversion, you won't have to worry about paying taxes for that account again.


Utilize your 401(k)

If you're still in the workforce but are planning to retire soon, utilize your 401(k). A 401(k) is a savings plan offered by certain workplaces that allow employees to invest a portion of their check into a pre-taxed savings plan. Your savings grow until retirement, when that money can then be withdrawn. Al-Beheary said investing in a 401(k) can make or break the future of your retirement. "If you're still working but are considering retiring any time in the future, take advantage of your 401(k)," he said. "Every penny counts."


Traditional IRAs and 401(k)s will be taxed

Not only will these types of accounts be subject to a tax when you withdraw from the account, but it will be the normal tax rate based on your tax bracket. There is no reduced tax rate for retirees. If you have multiple sources of retirement income, Turbotax suggests limiting withdrawals from pre-tax plans to only amounts you need or are required to withdraw to avoid unnecessarily high tax bills.


Consider delaying your retirement for increased benefits

Just because you reach the legal retirement age doesn't necessarily mean you should opt to quit the workforce and collect benefits. Aging myths suggest that you should fall out of the habits of life, but if you're happy and healthy, your later years are the best time to chase a new career or start your own business. And choosing to retire later in life has financial benefits as well. "Most people think they should retire at 65, but that's not necessarily true," Al-Beheary said. "People are missing out on opportunities to start new jobs, career or volunteering. You can leave your social security and get more money. People can say that they don't feel like retiring and capitalize off of that."

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Understand how investing will affect your post-retirement taxes

If one of your plans to make money while no longer working is smart investing, do your research. Al-Beheary said bad investment choices after retirement can lead to higher taxes and an increased Medicare deductible. "People retire and think that they'll find new investments to make money," Al-Beheary said. "But when you increase your income, your Medicare deductible and your taxes increase. You'll pay more than you should have."


Relying on a pension? It's taxable

If part of your retirement income is reliant on a pension, know that the full amount of that pension may be taxable.


Stay on top of social security changes

Retirees and anyone considering retiring soon should stay on top of the news and laws relevant to social security. "Seniors should look into social security increases each year and know how much they're getting," Al-Behear said. "A lot of seniors don't plan ahead, and if social security is your only source of income, new laws can make or break what your future holds." Staying on top of changes in the world is one habit that is good for you.

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