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Steer Your Tax Strategy Forward as You Approach Retirement

January 10, 2018
Pothole: Taxes near retirement
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The road to retirement is changing, and the phrase “near retirement” can mean different things to different people. For example, you might decide it's time to try out a new career. You might instead choose to work part-time, and maybe add some volunteer work to your schedule. Have too many bedrooms now that the kids are gone? Maybe it's time to downsize. 

Each of these changes may require a fresh look at your tax strategy as it relates to income, retirement savings, and allocating your assets.

Stay in the Driver’s Seat as You Transition

“Near-retirees need to think about what types of income they may or may not be getting in retirement,” says Lisa Greene-Lewis, a certified public accountant and TurboTax blog editor. “If someone is doing consulting work and a spouse gets Social Security, that may have tax implications." According to the Social Security Administration, if you and your spouse have “combined income” of more than $32,000, you may have to pay taxes on some of the Social Security income.

More retirees may be jumping into the so-called "gig economy," such as driving for Uber or Lyft, which means they’re subject to self-employment taxes, says Greene-Lewis. “But they’re also able to take deductions. For instance, if they are driving and purchase an SUV, they can get up to $25,000 in deductions for equipment they buy for their business,” she says.

The Other Type of RV—Retirement Vehicles

Managing retirement plans. As you cruise toward retirement, what should you do with your retirement plans? "Once you turn 50, you can step up your contribution limits with catch-up contributions: an additional $1,000 annually to your IRAs and an additional $6,000 for 401(k)s or 403(b)s," Greene-Lewis says. 

Leave it, roll it over or cash it out? Have you made, or do you plan to make any pre-retirement career moves? If so, what about those retirement plans? Provided you have more than $5,000 in assets, as a near-retiree, you may be able to keep the plan with a former employer until the plan’s normal retirement age. If the plan has good investment choices and low fees, this might be a good option. You can also roll over a 401(k) to an IRA —but make sure the funds go straight to the rollover IRA account to avoid any money being withheld. Fees, taxes, and penalties can considerably reduce the amount of money you will receive from cashing out early. The amount you cash out will be subject to a mandatory 20% withholding for federal income tax, and there is an additional 10% early withdrawal penalty if you are under age 59 1/2. You may also be responsible for ordinary income tax on the full amount of your distribution, as well as state and local taxes depending on where you live. 

Health savings accounts (HSAs). For those with an HSA, any distributions from it to pay for medical expenses are tax free. At age 65, HSA distributions used to pay for non-medical expenses are subject to income taxes, but retirees can avoid the 20% penalty that applies to those under age 65 who use the money for non-medical reasons. Additionally, Greene-Lewis said those over 65 can deduct medical expenses if they amount to more than 7.5% of the person’s adjusted gross income.


Home equity. As you move toward retirement, it may become time to shed some assets such as your home and maybe some of its contents, and that may have tax ramifications as well. You may have built up a lot of equity in your home, but if you’ve lived in it for at least two of the five years prior to selling it, you may not have to pay taxes on the capital gains. Greene-Lewis said tax laws allow a single filer to claim up to $250,000 in profit on a home sale with no taxes, and up to $500,000 for a married couple filing together. You should also consider any capital improvements made to the home (such as room additions, kitchen and bath upgrades, landscaping, etc.), and deduct the amount from the gross profit to determine what’s called your adjusted basis.

Charitable deductions. If you’re downsizing, you may also wish to pare down the amount of stuff you own. According to the IRS, in general, you may deduct charitable contributions up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. You may want to spread out your donations over several tax years.

The drive toward retirement can be an exhilarating one, but it's important to keep your hands on the wheel and steer clear of any tax obstacles.

This article In or Nearing Retirement? Steer Your Tax Strategy Forward was originally published on January 20, 2017.

Hands-On Retirement Planning

Retirement planning isn’t a set-it-and-forget-it proposition. A plan can take thoughtful care and maybe the help of a professional.

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