4 Tax Tips for Retirees

by | Dec 8, 2020 | Asset Management

Whether you’re just easing out of the workforce or you’ve been in retirement for a few years now, making the right financial moves is critical. You’ve worked your whole life to enjoy your retirement here at the Jersey Shore.  It’s important to stay on track with these tax tips. If you’re working with an advisor or taking a look at your finances yourself, one central goal during retirement is protecting your wealth from unnecessary taxes.

Below we’ll explain four tax tips you can utilize throughout the year to help minimize your tax obligations in retirement.
Tip #1: Take Your Required Minimum Distributions (RMDs)

First, it’s important to note that as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, passed on March 27th, 2020, RMDs are not required for the remainder of 2020.

However, with 2020 wrapping up, it’s worth going over the RMD rules for 2021 purposes.

An RMD is an amount that must be withdrawn from your retirement account. These required withdrawals begin when you, the retirement plan account owner, reach age 72. The rules apply to employer-sponsored retirement plans, traditional IRA plans and Roth 401(k) accounts.  These RMD rules do NOT apply to a Roth IRA.

If your IRA custodian or retirement plan administrator doesn’t calculate your RMD for you – it’s on YOU to do it. To find out what your RMD is, the IRS provides life expectancy tables to utilize according to your circumstances. If you do not withdraw the RMD (or the correct amount), the amount not withdrawn will be taxed at 50 percent, which is why it’s critical to take your RMDs and withdraw the correct amount.

Tip #2: Manage Your Retirement Income 

Social Security will likely account for a portion of your income in retirement. However, not all of your benefits are taxable, and there are ways to minimize or, at times, eliminate taxes on your Social Security benefits.

Rules regarding Social Security income taxes also vary from state to state, so always check with your state regulations to determine the best solution for you. What works for you here in Monmouth County may not work for a retiree outside of New Jersey.

It’s also important to manage your investment accounts properly for tax purposes.  Drawing down accounts in the right order can help reduce your tax bills during retirement.  A financial planner can help create a retirement income plan to determine where to draw from first.

Tip #3: Pay Your Quarterly Taxes (IF NEEDED) 

If you don’t have taxes withheld automatically, you may need to pay estimated tax payments. Individuals who are expected to owe $1,000 or more – or those whose withholding and refundable credits are 1) less than 90 percent of the tax owed or 2) at least 100 percent of the tax on the previous year’s return – must pay estimated tax.

In some cases, you might decide to pay quarterly taxes, even if you are not required to, in an effort to avoid the inconvenience of paying a large sum all at once. If you miss a payment or underpay, you may be charged a penalty.

Tip #4: Get to Know State Tax Laws Where You Plan to Retire

If you’re relocating to a new state during retirement, consider the impact of the move on your financial situation. Retirement here in Spring Lake, NJ would look different than retirement in Miami, FL.  Retiring here at the Jersey Shore would be different from a tax perspective than retiring in New Hampshire. Florida and New Hampshire don’t tax on income or only tax on dividends and interest. On the other hand, they may have higher property taxes. In addition to nicer weather or a more serene lifestyle, you might decide to move to a new state in an effort to save on taxes.

Once you stop working, most folks are operating on a finite amount of money in retirement.  It’s crucial to make the right financial decisions in retirement.  Having a plan for your retirement income taxes can help make your money last longer.  If you need help creating a retirement tax plan, we’d be happy to speak with you.  Click this link to schedule an initial call with our team!


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