Tax Planning for Retirees

Article Posted on 11/07/2019

Tax planning often involves efforts to defer income and accelerate expenses, but in some scenarios doing the opposite results in the lowest tax burden over time.  One of those situations relates to certain retirees.


Many retirees rely mainly on Social Security income and income from their retirement accounts.  Once a taxpayer reaches age 70 and ½, they are required to receive minimum distributions from certain types of retirement accounts.  These distributions are then taxable on their personal income tax return.  Depending upon the level of these required distributions along with other factors including the amount of Social Security benefit payments received and any other taxable income, there may be tax advantages in the long run to either withdrawing additional amounts from the retirement accounts as taxable income or converting portions of those accounts to an after-tax investment, also resulting in taxable income.


Amounts in pre-tax retirement accounts will be taxable at some point either to the taxpayer or to their heirs.  Depending upon income levels, it may be possible for the retiree taxpayer to include converted amounts or additional withdrawals on their return as taxable income but pay no tax if their ending taxable income does not exceed the standard deduction.  This creates a permanent tax savings on those amounts, and essentially converts future taxable income to tax-free income.


The calculations are complex because of special rules related to the taxability of Social Security.  Other factors also need to be considered.  Please contact your accountant with questions about specific situations.


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