Top TaxDeferred Savings Tips for Retirees
Post on: 2 Октябрь, 2015 No Comment
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Retirement isn’t the finish line when it comes to retirement savings; it’s just another stage, and it’s one that retirees need to adjust to. After decades of contributing to tax-deferred retirement savings plans that reduce taxes, you’re now withdrawing from those accounts and paying taxes at the regular rate.
For those on the cusp of retirement, there’s more to making smart financial decisions than just making money. At this stage, there are a number of unique tax-planning opportunities that can help you save money over the long run.
What’s next for your 401(k)? Workers about to retire should do everything they can do increase or max out their contributions to tax-deferred retirement plans, like individual retirement accounts (IRAs), 401(k)s, or 403(b)s. In 2013, you can contribute a maximum of $17,500, or $23,000 if you’re over age 50.
Depending on your tax bracket, every dollar deposited into a 401(k) could save you anywhere between $0.10 and $0.40 in income taxes for the year in which the contributions are made. For example, if you contribute $5,000 to a 401(k) the year before you retire, it would be taxed at 35%. Withdrawn in retirement, the funds are taxed at 15%, meaning the 20% difference in tax rates translates into a savings of $1,000.
Should You Delay Claiming Social Security?
For those already retired, you can consider delaying your Social Security checks. One benefit of waiting to collect Social Security until you’re older is that your checks will be larger. Even though you can start collecting Social Security any time between 62 and 70 years old, for every year you wait, your check will grow by roughly 6.3%. (Source: “Retirement Planner: Benefits By Year Of Birth,” U.S. Social Security Administration web site, last accessed March 15, 2013.)
Taxes also play a major part. One recent study showed that if you had retired in 2011 at 62 with $700,000 in savings and started tapping your monthly Social Security checks of $1,125, your portfolio would be depleted in 30 years, assuming you maintain the same spending level. (Source: Meyer, W. and Reichenstein, W. “How the Social Security Claiming Decision Affects Portfolio Longevity,” Journal of Financial Planning April 2012, last accessed March 15, 2013.)
If, on the other hand, you used your own assets to fund the early stages of retirement and waited until 70 to start taking your then-larger social security checks of $1,980—your portfolio would last at least 40 years at that same spending level.
Why? In part, because Social Security benefits count for only 50% of the combined-income threshold (the amount of taxes paid on all streams of income). So it pays to wait.
Give the Gift of Appreciated Securities!
If you’re thinking of giving money to your children or grandchildren, or are thinking of giving a charitable donation, consider the gift of appreciated securities. Held for 366 days, securities, like stocks, bonds, and mutual funds, can provide you with some attractive tax benefits.
An outright gift of long-term appreciated assets may avoid capital gains taxes and, in most cases, you obtain a charitable income tax deduction equal to the market value of the securities.
Those who are already retired have more control over their tax situation than those who are not, since they get to decide how much they need to withdraw from their different retirement plans. By implementing a number of time-tested retirement tax-planning strategies, retirees can significantly limit the amount they pay in taxes.