If you’re retiring or planning to retire soon, think carefully about your tax strategy
NEW YORK — Coming up with the best tax strategy in retirement can be much trickier than it seems, and tax professionals agree that this is a time when people should be especially careful and look at their entire financial picture before deciding on things like 401(k) ) withdrawal amounts. and timing, or when to start taking Social Security.
āIt’s the biggest change in life, apart from death. Don’t be so quick to decide when to take Social Security benefits or 401 benefits. Talk to a tax professional before making these decisions to avoid any surprises. It can save you a lot of tax money,ā says Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals.
Withdrawing a large amount of money to pay off a mortgage, for example, could lead to a dramatic increase in the percentage of your Social Security benefits.
āA capital gain of $20,000 could result in an equal amount of Social Security income becoming taxable. Capital gains can also impact the other parts of your tax return,ā says OāSaben.
āSome people take a large distribution from their 401(k) to pay off the house, for example. Well, now you have increased your income bracket and you are taxable on 85% of your social security,ā he emphasizes.
Withdrawing from a retirement account too early can also lead to large penalties or a surprise in taxes due.
And if you receive Social Security benefits earlier than necessary, it could result in you receiving much less each month than if you had waited until the maximum age of 70.
On the plus side, it’s not too late for taxpayers age 50 and older to make catch-up contributions to their traditional or Roth IRA for tax year 2023. Catch-up contributions to an IRA are due on the due date of your tax return (return extensions). are not included).
Taxpayers about to retire can still make this catch-up contribution, which can increase their retirement benefits and reduce their taxable income for 2023, says Kathy Pickering, chief tax officer at H.&R block.
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Find more information about AP’s tax season coverage here: https://apnews.com/hub/personal-finance