Tax Tips to Consider When Retiring

After spending the majority of your working life saving and planning for retirement, it is sometimes challenging to make the switch to retired living. Once you have reached this lifelong goal of retirement, many aspects of your life will change. How you spend your time – and, more importantly, your money – requires a bit of adjustment. Instead of focusing on contributions made to your retirement account, you will now have to change gears and begin accessing your money to pay for living expenses. It is important you understand the best ways to handle retirement accounts and other assets to avoid tax issues and protect your savings. Consider the following tips when handling your retirement accounts and other savings plans:

Social Security

It is important to carefully consider when you will begin accepting your Social Security benefits. At age 62 you can begin taking your Social Security benefits; however, in doing so you will reduce the amount of benefits for which you are eligible for the remainder of your life.  Collecting Social Security benefits before normal retirement age will reduce your benefits by 25% or more and may be subject to taxation if you are still working.  Social Security benefits may be taxed if your income exceeds the established threshold for your filing status.

401k Rollover to IRA

If you choose to move your 401k from your employer’s plan to a traditional IRA, make sure the funds are transferred directly to the new custodian versus having a check written directly to you. By having the money transferred, you protect your tax deferred status and avoid potential negative tax consequences.  When an employer writes a check to the account owner, they are required to withhold 20% of the available balance for taxes.  If your money – including the 20 percent withheld – is not invested in an IRA within 60 days, it will be treated as a distribution and subject to taxation.  Early withdrawal penalties will be applied as well if you are under 59½ years of age.

Mandatory Distributions

By age 70½, be prepared to start taking mandatory distributions from retirement accounts that require them.  Traditional IRA, 401k and Roth 401k accounts mandate that account owners begin taking taxable mandatory distributions at age 70½ or face stiff tax penalties. If you fail to take the required mandatory distribution, you will lose 50 percent of the amount you were required to withdraw from your account to Uncle Sam.

Estate Planning

Reduce the amount of taxes your heirs will be responsible for by planning your estate in advance. Make sure you name your beneficiaries in order to reduce the chances of your estate landing in probate. Many retirees begin transferring assets to an irrevocable trust that allows assets to pass on to beneficiaries tax-free.  If your estate is taxable, consider gifting money to your heirs while you are still alive to reduce taxes.  Gifts of up to $12,000 per individual or $24,000 per married couple are tax-free.

After working your entire life to ensure financial security for your golden years, it stands to reason that every effort should be made to protect your savings and assets for you and for your beneficiaries after you pass away. By making the necessary adjustments in how you handle your personal finances you can rest assured your hard earned money is benefitting those who count on it most.

This guest post was provided by, a website that helps taxpayers find tax solutions to their IRS tax problems.

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