Here Are The Biggest Tax Mistakes Retirees Make
There is this old saying – nothing is certain except death and taxes. And truth be told, once you retire tax planning doesn’t end. So, you basically get to acknowledge that you will spend your retirement in planning and getting the most out of your retirement savings and adequate taxing.
But, if you don’t plan your retirement well you can expect to get more headache then on your full-time and regular job.
After all, some retirees live on less in retirement than others, while others may end up spending more. Spending more means that it could lead to higher tax bills, especially if tax rates are raised in the future. So, how can you make the most out of retirement? Simply, by avoiding this 5 tax mistakes.
1. You Think That You Will Pay Less Taxes In Retirement
This may be your first obstacle. Don’t just assume that you will pay less taxes in retirement. Paying less taxes and falling into a lower tax bracket doesn’t happen once you retire. Many Americans are simply unprepared to maintain their current standard of living in retirement.
In most cases, they have lower taxes, suggesting that they have a lower income. Make sure that you track massive tax-related changes and new retirement actions conducted by the government. If tax rates increase, you may find similar or higher tax bills in retirement.
2. You Don’t Think About Social Security Taxation
Are you familiar with provisional income? If not, don’t worry, you are not alone. IRS uses the provisional income to determine whether or not your Social Security benefits will be taxed because they can be taxable.
Distributions from your IRA accounts are considered to be a part of your provisional income. Make sure that you talk with your financial planner to learn about provisional income and any additional tax. There are some ways on how you can strategically minimize the taxes on your Social Security benefits.
3. Ignoring Taxes
You can’t hide from taxes, neither you should avoid them. You probably love that smile on your face when you see the total of your earning, right? And you probably just hate that feeling once you realize that the number shown is without taxes? This kind of problem is easy or easier to fix when you are ages away from your retirement.
However, when you have already left the workforce it will be harder to make up the difference. This is especially difficult when the taxes are high. That being said, make sure that you always think about your taxes and pay on time.
4. You Don’t Have A Clear Strategy On How To Minimize Taxes
If you are or will be a retiree relying on Social Security, you don’t have to plan much. But, if that’s not the case you need to be proactive and do your math. Because, after all a penny saved is a penny earned. That being said, plan.
Take the proper time to do some tax planning. By doing so you will help yourself and stay away from the hard-earned money that Uncle Sam keeps for you. If you don’t know how to do this, you should contact a professional financial planner who can help you develop a proper strategy.
5. Drawing A RRIF Too Late
You may want to save more and therefore, you may not have to take withdrawals from your Registered Retirement Income Fund (RRIF) until you hit your seventies, but sometimes you really shouldn’t wait for too long.
If you want to retire early, this applies especially to you, as you should take RRIF withdrawals long before you reach your 70s. Little is known, but RRIF withdrawals are fully taxable if a retiree has a low income in their 60s.
On the other hand, if you have a high income in your seventies you will end up paying more in taxes. Overall, delayed RRSP conversion could lead to a retiree being pushed into a higher tax bracket or even to having their Old Age Security (OAS) pension reduced.
Retirement is supposed to be ‘the golden years’ but making just a few tax-planning mistakes along the way may ruin all of your plans. You should bear in mind that taxes don’t get less complicated when you retire. Therefore, you should be ahead of eventual problems by having proper tax planning and concrete steps on how you can avoid most common tax mistakes.