For those approaching retirement, it is important to pay attention to the rules in order to reduce tax costs. Paying tax on the limited funds available to many retirees can be frustrating, so understanding the system is crucial.
It is vital to realize that withdrawals from retirement savings are taxable. For example, a $30,000 withdrawal from a 401(k) with a 15 percent tax rate will result in a payment of approximately $4,500 to the IRS. The same applies to pension plans and some annuities. Understanding tax rules is essential for budgeting and planning retirement income.
One good tip is to maximize any medical deductions. Although medical costs can take up a large amount of income, they are also tax-deductible. By itemizing costs, you can claim a medical expense deduction, as long as your out-of-pocket expenses reach 10 percent of your adjusted gross income (AGI).
It is wise to move taxable stock investments into bonds before retirement. This can achieve a steady stream of federal tax-free interest income. Also, by buying municipal bonds from a home state, local and state taxes can be avoided. Mortgage interest can also be deducted from taxable income, so homeowners still paying their loans should take advantage of this.
Retirees often downsize, which can be a good time to donate items to charity. As well as making the move easier, the value of the goods can be deducted from taxes, helping to maximize retirement income.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.