1. Social Security
Do you expect that Social Security benefits will be your only source of income in retirement? Many people find that Social Security doesn’t cover all their retirement needs, so it’s in your best interest to plan to supplement your retirement income by saving as much as possible in a workplace retirement account or other type of retirement plan before you retire. Building retirement savings will probably mean that at least some of your Social Security income will be taxed (depending on your combined income from Social Security and other sources), but it will also give you greater financial security. Keep in mind, too, that you can have taxes withheld from your monthly Social Security payments and avoid having to make quarterly estimated payments. Your CPA can answer all your questions about possible taxes on Social Security benefits and retirement planning in general.
2. Retirement Accounts
If you contributed pre-tax income to a retirement savings account, you will likely be taxed on distributions from that account. That includes distributions from a traditional IRA, 401(k), 403(b) or 457(b) plan. It also applies to distributions from accounts for small businesses, such as SEP-IRAs, SIMPLE IRAs and SARSEPs, as well as income from an annuity held in an IRA or similar retirement account. Your distributions from a Roth IRA, on the other hand, are tax free. Once again, your CPA can offer advice on the best retirement account solutions for you.
3. Required Minimum Distributions
You must begin taking required minimum distributions (RMDs) from most retirement accounts, including traditional IRA and workplace retirement accounts, once you reach the age of 70½. Your annual required minimum distribution amount is generally based on your life expectancy and your account balance. You can always take more than the RMD, of course, and all distributions will be included in your taxable income. Want to avoid taxes on retirement distributions? There’s no RMD for a Roth IRA, and distributions you take from these accounts are tax free. Don’t need the money from your RMD? A qualified charitable distribution to the charity of your choice lets you donate some or all of your RMD, which lowers your taxable income (and your tax bill).
4. Home Sales
Many people downsize or move closer to family when they retire. If you sell your home at a profit, will you have to pay taxes on that gain? Generally not, if you owned the home and used it as your main residence for at least two out of the last five years leading up to the date of the sale. The maximum exclusion is $500,000 for a married couple filing jointly and $250,000 for a single filer. Additional exceptions may apply, so consult your CPA for advice on your situation.
5. Your CPA Can Help
Every day, local CPAs offer clients expert advice on a wide variety of financial concerns, including making a major purchase or obtaining a loan. Whatever your financial questions, your CPA can help you find the answers. Locate a CPA near you with our Find-A-CPA directory.
Reprinted with permission from NJCPA