Retirement tax planning

Tax season is over. No time like now (while the facts are fresh) to look at what you paid in taxes and the source of those tax hits. What should retirees (or soon to be retirees) consider? Time to plan and implement strategies for 2011 and the future.

Can you answer this question: Will you get a refund or not next year? I won't (but then I plan it that way - I won't owe a lot either). If you don't know the answer now is a good time to answer that question. You can owe up to $1,000 without penalties so you want to make sure that you meet that threshold (make quarterly payments if needed). Be proactive. Look at last year's return. Where did all your tax liability come from? Stop being a victim to taxes and take control of how you pay your taxes to Uncle Sam. Make sure next April is not a huge surprise.

If you feel incapable of analyzing your return maybe it is time to consult a financial planner to go over your most recent tax return and explain in detail where all the tax liability originates. You want to make your cash flow as tax efficient as possible.
　
We spend a lifetime planning and accumulating funds for retirement and little or no time in planning the distribution of those funds. Do you have a pension? Are you collecting or planning to collect Social Security? How much additional cash flow are you going to need to draw from your assets to maintain an acceptable lifestyle?

What assets are making you Social Security mare taxable? You need to look at sources that are taxable and assets that are non-taxable. For example you pension is probably taxable in part (or all). Withdrawals from regular 401Ks and regular IRAs are taxable. Withdrawals from Roth IRAs (Roth 401Ks) are not taxable. Money from savings (IE CDs) are not taxable (the interest is). So maybe you want to draw down savings generating taxable interest (not that that is a problem with current low interest rates - another reason you may want to reduce the assets in this bucket) . Maybe you have investments you can turn into cash with little or no taxes (sell losers to offset gainers?).


You may want to tap sources of cash flow that will limit the taxes on your Social Security benefits. See prior posts on tax planning and Social Security:


http://boomerfinancialsurvival.blogspot.com/2011/02/retirement-doesnt-mean-no-tax-planning.html

Other strategies may be to take advantage of tax credits by installing solar panels or a wind turbine to generate a tax credit (and reduce future utility costs). Or you need to replace a washer or dryer get one that qualifies for an energy savings tax credit?


Whether to file itemized (or standard deduction) may depend in large part on medical expenses. Planning those expenses into one year to maximize them is a strategy to maximize the benefit especially if a procedure is needed but optional.


This is not meant to be a complete tax guide, but a starting point. At age 70 1/2 you face RMD (Required Minimum Distributions) from IRAs and 401Ks. This RMD needs to be considered in your tax planning today - especially if that minimum is substantial. It might make sense to transfer a sum each year to a Roth and pay the taxes now?