Richard A. Lindsey, CPA Lindsey & Waldo, LLC – Certified Public Accountants
  • 5 Tax Pitfalls to Avoid in Retirement

    Filed under Informational, Taxes
    Oct 13

    As we transition from our income earning years to our retirement years we begin to realize that each period has a different set of tax pitfalls. Here are 5 of the most common. Each of which can be avoided with a little planning.

    Missing the tax impact on Social Security
    A portion of your Social Security benefits may be taxable. The formulas are complicated (see example later), but in general terms, if your “Modified Adjusted Gross Income” (MAGI) exceeds $25,000 ($32,000 for joint filers) then it’s likely 15% of your Social Security benefits will be taxable at your ordinary income rates. If your “provisional income” exceeds $34,000 ($44,000 for joint filers) then up to 85% of your benefits could be taxable. Receiving income such as retirement benefits or IRA distributions which cause your income to jump from one level to the next can have a severe impact. You’ll pay income tax on the distribution, plus you’ll increase the portion of Social Security benefits which are taxable, sometimes doubling the tax burden.

    Missing the difference between growth, income, and cash flow
    Growth is what you need your portfolio to do in order to have enough money to last your entire retirement. Income is what you will have to pay taxes on, and cash flow is the after tax cash you have to spend on your needs and desires. The goal is to have sufficient cash flow to live your life like you want while paying the least amount of tax possible, and, at the same time, leaving enough in your portfolio for it to continue to grow at a rate that keeps up with, or exceeds, inflation.

    Missing a required minimum distribution
    Failure to take a required minimum distribution could subject you to penalties as high as 50 percent of the missed distribution. You must take required minimum distributions from any qualified plan or traditional IRA once you reach age 70 ½, and every year thereafter. Don’t rely on your bank, or broker, or anybody else to remind you about this. They will not pay the penalty for you! Roth IRAs are exempt from this requirement.

    Missing beneficiaries on qualified accounts
    Without a named beneficiary, the money in a qualified account reverts to your estate. The name, or names, listed on the account supersedes anything named in your will or trust, so it’s also a good idea to name a successor beneficiary.

    Missing the right beneficiaries
    It is generally best to name individuals as beneficiaries instead of your estate or a trust. You also want to avoid multiple beneficiaries with wide age differences. The minimum distribution will be determined using the “life span” of the oldest beneficiary. To avoid this pitfall, consider dividing your IRAs into separate accounts, each with a different beneficiary.

    For those two of you who are interested, here’s the example I promised:
    John and Jane Smith have an adjusted gross income of $44,000 for 2016. John receives Social Security benefits of $7,200 per year and together they receive $6,000 a year in interest from tax-exempt municipal bonds. On their joint return, the couple would make the following calculations:

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