Spring forward into tax season! Even after retirement there some wise tax tips from experts that can save money.
"One great strategy for seniors is to pull a little each year from pre-tax accounts like 401(k)s accounts and after-tax accounts like Roth IRAs so they can stay in a lower tax bracket," said Bill McNulty, CEO of IRAmarket. IRAmarket is a website that helps retirees and other consumers to help compare retirement accounts and learn retirement finance strategies.
Mr. McNulty said that the key is to take from a variety of accounts in order to maintain the lowest possible marginal income tax rate in retirement. "It comes as a surprise to a lot of people that the higher their tax bracket, the more income tax they have to pay on their social security benefits," he said.
In addition, for those of retirement age but not fully retired, Mr. McNulty said there are advantages. "Most don't know that they can continue to contribute to a Roth IRA after age 70," he said. "And get tax-free investment gains for their later years."
Another great tax tip is around Health Savings Accounts (HSAs). "HSAs can function like an IRA, but instead of the money growing tax free for retirement, it grows tax free for health care expenses," Mr. McNulty explained. "People should be considering saving for out-of-pocket healthcare costs in retirement." He pointed out that retirees can use a HSA to pay Medicare premiums and other qualified medical expenses.
Clarissa Hobson, a Certified Financial Planner based in Colorado Springs, Colorado, thinks people should know that long-term care insurance premiums are tax deductible. "The deductibility increases based on age," she said. "So make sure to make these deductions when filing your taxes."
In addition, Ms. Hobson said that some medical expenses that were not deductible when you were working might be after retirement. "They might be deductible once you retire if you have significantly lower earned income."
Another tip that might be useful prior to retirement is to be aware of how your income two years prior to drawing Medicare will determine Part B premiums. "Even if you go from working with a large earned income to very little income in retirement, you might have to pay higher Part B premiums for a couple years," she said. "This can also have an impact for people making Roth IRA conversions in retirement, as this income could also push up Part B premiums."
Financial advisers say that it is a common misconception that people are in a lower tax bracket after retirement, and that good planning is required to be in that tax bracket.
"Here's a retirement tax tip that you normally won't hear from Wall Street advisers," said Brian Solik, President and Founder of Wealth Preservation Strategies of New Jersey. "Many couples retire with most of their retirement money in tax-deferred accounts like 401Ks and IRAs, and without any life insurance." This might be because either their term insurance or company sponsored life insurance expired, he added.
If they have little to no money in tax-free accounts and no life insurance, Mr. Solik recommends that retirees look into withdrawing a percentage of their IRA/401K each year -- usually 10% or less -- and investing this money in a cash-value life insurance policy on one or both spouses.
"This accomplishes several important things with this transfer of money," he said. "A tax-free death benefit is available to the surviving spouse; those financial planners who don't think that having life insurance is important in retirement probably haven't spoken to many retired wives who have seen their husband's life insurance goes to zero. And the policy can be structured to allow for tax-free withdrawals of cash loans in later years if death does not occur. This technique can thus provide for tax-free money both during a life or death scenario."
One final tip is to stay on top of the latest news as laws are constantly changing that can affect who can be a beneficiary, and many other aspects to managing money and keeping taxes low after retirement.
For more information about the legal and financial planning needs of seniors, visit Homewatch CareGivers and download the Guide to Legal and Financial Planning.