The Baby Boomer generation is swiftly approaching retirement or have already entered it. Understanding the tax code can not only save you money, but it can help you plan your future. Here are five simple tax tips you need to know now.
1. It’s not too late start a retirement saving plans
Even if you’re already in retirement, this tax tip will help you stop paying so much to Uncle Sam.Roth accounts accept post-tax money and let you withdraw funds tax-free in retirement. If you’re planning to retire at 62 or 67, then you have 10 or 15 more years of saving and investing. If you can make the maximum annual contribution (currently $6,500 for those 50 or older and $5,500 for younger folks) each year and it grows by 8% annually, you’ll end up with $101,700 after 10 years and $190,600 after 15 years, while potentially saving tax free.
2.Take your RMDs
Tax-advantaged retirement accounts like IRAs, SIMPLE IRAs, SEP IRAs, and most 401(k)s — including Roth 401(k)s) feature “required minimum distributions”. Boomers are able to begin tapping any of these retirement accounts beginning at age 59 1/2, but once you turn 70 1/2, you must be making withdrawals of a certain minimum size. There are online calculators that can help you estimate how much you’ll need to withdraw. If you forget to take an RMD, or don’t withdraw the full amount, the IRS will seek 50% of the amount you didn’t withdraw, costing you big bucks.
3.Avoid dipping into your accounts early
Taking money out of your IRA or 401(k) before you hit age 59 1/2 means that you’ll be taxed on the withdrawal and potentially face a 10% penalty charge. Double-check the fine print on any account you’re planning on drawing money from.
4.Social Security benefits are taxable
Before retirement, most people assume Social Security benefits are free from Uncle Sam’s hand in your cookie jar, but that’s not the case. In certain circumstances, they may be taxed. Here are the current regulations:
A.If your “combined income” (which includes your adjusted gross income, your tax-exempt interest, and half your Social Security benefits) is less than $25,000 for a single filer or $32,000 for a married-filing-jointly filer, your benefits won’t be taxed.
B.If that income is between $25,000 and $34,000 for single filers or between $32,000 and $44,000 for joint filers, then you may be taxed on up to 50% of your benefits.
C.If your combined income tops $34,000 for single filers or $44,000 for joint filers, then you may be taxed on up to 85% of your benefits.
Being prepared for your retirement isn’t always easy, but arming yourself with the knowledge base on how to firmly secure your financial future through taxes, savings and social security can be a huge relief.