Retirement should be the time of your life when you are able to relax and put all your financial worries to bed. However, it isn't always easy to do so, whether you have reached this stage of your life with enough money in the bank or not. There is a plethora of complex tax penalties on retirement accounts and avoiding them can feel like a full-time job in itself; you can get penalized for not withdrawing enough, and likewise for withdrawing too much too often. Check out our top ten list of tricks for avoiding unnecessary tax expenses on your retirement account withdrawals so that you can make the most of your golden years.
1) TIMING
Firstly, plan the timing of your withdrawals sensibly. There are early withdrawal penalties on most traditional IRA accounts if you withdraw money from them before you reach the age of 59 and 1/2 years old. This will amount to a 10% penalty in addition to the income tax charged for each withdrawal made and is totally avoidable. If you have a 401(k) account, you can withdraw money without incurring penalties up to four years earlier at the age of 55, provided you have left the job that is associated with the account no earlier than at age 55.
2) TRUSTEE TO TRUSTEE TRANSFERS (AKA Retirement Plan Rollovers)
Additional taxes can also be avoided by skipping withdrawals entirely which are taxed at 20% of income from 401(k) accounts when you change your job. If you can come to arrangement with another holder of a trustee 401(k) or IRA account and make a transfer directly from your account to theirs the transfer will not be taxed.
3) MINIMUM DISTRIBUTIONS
While you can be penalized for withdrawing too much as described above, you can also get charged 50% of the minimum amount you are required to withdraw plus income tax if you do not withdraw enough money on time after the age of 72. However, if you are still working after this age limit and you are not in possession of at least 5% of the company you work for, you can delay this charge on a 401(K) account.
4) KNOW YOUR TAX YEARS
After you turn 72, you will be required to withdraw money from your retirement accounts twice per year, on April the 1st and December the 31st. Depending on when your birthday falls, if you are crafty, you may be able to separate these withdrawals into two different tax years so that you do not get charged for both withdrawals in one go.
5) START WITHDRAWING EARLY
As Mina Northwick, a writer at 1day2write and Britstudent suggests, “if you have that nice problem of having slightly too much money and fall into a high tax bracket, it can be beneficial to begin withdrawing from your accounts in small increments early.” This will distribute your tax bill evenly into more manageable chunks and keep you in a lower tax bracket.
6) DONATE TO CHARITY
If you are over 70 years of age, you can donate a portion of the wealth, up to $100,000, from your IRA account to charity free of tax charges. Offloading in this way is another penalty-free method of keeping yourself in a lower tax bracket.
7) ROTH ACCOUNTS
Check out what a Roth Account could do for you. Unlike IRAS and 401(k)s these allow tax free investments and withdrawals and can help you lock in a lower tax rate.
8) SOCIAL SECURITY
Don’t assume that you can’t qualify for social security payments. If you can lower your provisional income to less than $25,000 per individual or under $32,000 as a married couple, you will be entitled to social security which is not taxable.
9) CONSIDER WHAT YOU SPEND ON
Some early penalty withdrawals are avoidable if you use your money for a certain purpose, for example if you spend on a medical bill, a mortgage, a new car, or a college fee. Tax blogger, Peter Goodfellow at Originwritings and Write My X encourages his retired followers to invest in their children and grandchildren if possible since “contributing to family expenses such as college fees, are often excluded from taxation by certain retirement accounts.”
10) MOVE
Where you live can also have a huge impact on how much tax you are required to pay in retirement. Some states do not charge income tax if you are retired and unmarried!
We hope that these ten simple tips for making the most of your retirement funds without being penalized by avoidable charges can help you feel in control of your finances during your later years, and enjoy your retirement fully. For more great advice on how to manage your accounts as you retire from work, try checking out the amazing resources available throughout our blog, such as How and Why to Start a Business in Retirement.
For more tips and information regarding retirement plans, contact us.
