Those planning to retire in the near future often rely on the idea that their tax bill will be reduced. Unfortunately, this is often not the case for many American taxpayers. Changing circumstances in the field of tax law may play a role in this discrepancy, but retirees’ failure to properly plan for their futures likely plays an even bigger one. Fortunately, this mistake can be easily avoided.
An experienced Tax Attorney can provide planning tips to maximize your tax breaks when you retire. The Tax Attorneys, CPAs and EAs at The Tax Law Offices of David W. Klasing have decades of experience helping taxpayers successfully plan for their retirement. Call us at (800) 681-1295 today, or contact us online for a reduced-rate consultation.
There are a few major reasons why Americans might find they are not seeing the tax reduction they thought they would when they retire. Taxpayers would be well-advised to keep all of these on their radar when planning for their retirement.
Many of the deductions and credits working individuals were able to claim before reaching retirement will no longer be available to them. Most retirees will have likely paid off their mortgages by this point in life, so there will be little interest to claim as a deduction. With no more children to claim as dependents and no more contributions to 401(k)s, the bottom line is that almost all of a taxpayer’s income is taxable during retirement.
Tax brackets in 2017 are among the lowest tax brackets that have ever been. While this would normally be viewed as a plus, the effect it has on retirement should be noted. With Social Security, Medicare and Medicaid remaining unfunded liabilities, tax brackets are almost guaranteed to rise in the near future.
It’s a simple fact that maintaining the same standard of living will require the same monthly income. Once an individual stops working, they clearly will not enjoy the same income they had before. Increased traveling and new hobbies can also account for an unforeseen surge in spending.
In order to have a successful retirement plan, there are many tools you might want to consider using. All of them can be used together to maximize your tax benefits in retirement. We will discuss three in detail below.
A Health Savings Account (HSA) is a formidable tool to cover medical expenses. It can also serve as a flexible spending account that never expires, as well as an extra retirement savings fund. An HSA can provide three distinct tax breaks. Your contributions are sheltered from income taxes, the money grows tax-deferred, and the funds can be withdrawn tax-free for medical expenses. In addition, most employers will contribute to an HSA annually. Though you will still have to pay taxes on money you withdraw, you won’t face the usual 20% penalty if you spend it on non-qualified medical expenses.
Many taxpayers are not aware that they might still be able to make after-tax contributions to their (401)k even after they have maxed their pretax contributions out. Those after-tax contributions can be rolled directly to a Roth IRA. This method is extremely beneficial and essentially creates a reserve of tax-free money that will be available in the future.
Rather than leaving your money with your old employer, you can move it into an IRA account under your control. A reverse rollover is essentially moving money from an IRA into a workplace retirement account. Taxpayers who choose this method can avoid taking a tax hit from minimum distributions that become required at age 70 ½. If you are still working, it’s likely you will not need to dip into the funds in the IRA. As long as you are employed, you won’t need to take required minimum distributions from your current 401(k).
These tools, while highly useful, are not the only ones that can be used for this purpose. Qualified charitable deductions, Roth conversions and nondeductible IRAs can also be part of an effective plan to navigate your retirement.
Preparing for your retirement can seem daunting and confusing. Having a detailed plan to deal with your tax responsibilities in retirement is essential and an experienced California tax attorney can be the difference between a fruitful or burdensome outcome. Whether you need help creating a retirement plan, or are facing an audit or criminal investigation, the tax professionals at the Tax Law Offices of David W. Klasing can help. Our attorneys, CPAs and EAs have decades of experience handling all types of domestic and international tax issues and are ready and willing to represent your interests. Call us at (800) 681-1295 today, or contact us online for a reduced-rate consultation.