New retirees often find it difficult to work out their finances to make ends meet. The rising cost of healthcare also makes it difficult to cover day-to-day expenses. While you can’t avoid paying taxes altogether, there are ways to minimize the amount of taxes you pay so that more of your hard earned wages are spent on you rather than in the government’s pocket. Here are a few mistakes retirees make.
Not following the minimum distribution policy
By not following the minimum withdrawal policy after hitting the age of seventy and a half years old, you could end up with a fifty percent penalty! Take the distributions when you need to and report them on your tax return in order to avoid this penalty.
Converting too much money to a Roth IRA
Although many people convert their IRA traditional accounts into a Roth IRA, the money converted is considered taxable income. The additional income can change your tax bracket, and converting too much money in one go means you are taxed at a higher rate. The best way to convert to a Roth IRA is to do so over a series of years. If you need help understanding which tax bracket your conversions will put you in, you should consult a financial advisor or tax advisor to avoid paying more than you need to.
Not keeping track of expenditures
You may think that just contributing the amount you pledged towards your pension is enough to keep you financially secure without thinking about deductible taxes. People who spend more at least 10% of their income on healthcare can deduct those additional expenses from their income. Self-employed people should ensure that they keep separate files for their business and are able to produce records for tax deductions. Businesses that have been in the red for at least three years will not be eligible for the deduction.
Not paying taxes due
Failure to file or pay taxes can result in a variety of penalties that can eat into your retirement money. For every month you are in debt, you receive a 0.5% penalty on the total amount of money you owe; this penalty can be increased each month up to a maximum of 25% of the total amount owed! Failing to file will land you with a penalty of 5% for each month that you fail to pay up to 25% of your debt; so, by not filing or paying you could end up losing 4.5% in fees alone.
If you cannot pay what you owe for whatever reason, you should compromise with the tax office by creating a payment plan to catch up.
Filing tax returns without professional help
If you don’t know what you are doing and the numbers seem confusing, so don’t try to go at it alone to save money. Getting professional assistance could help you learn more about tax deductions and how to implement strategies that will leave more money available to you when you retire. Tax returns can be extremely complex and trying to do them alone increases your risk of being audited.
If you still do not want to bring in a professional, you should use preparation software options available online. Taxes filed online have an average failure rate of 0.5% whereas paper tax returns have average error rate of 21%! It’s definitely worth using a professional or available tools rather than filing alone in order to save money.
Withdrawing from your retirement account early
Putting money down on a new home mortgage or paying off debt with money from your retirement account is tempting, but taking money from your retirement fund early is not advisable. Withdrawing money from your account before the age of 59 ½ subjects you to a 10% withdrawal penalty. There are exceptions to the rule that you should check before making the decision. If you don’t qualify for the exceptions, you will be subject to the penalty.
This article contains just a few of the mistakes commonly made by new retirees. If you don’t know your way around the tax rules, exceptions, and sanctions, give us a call. Our tax practice CPAs will make sure that you get the right deductions applied so you can make the most out of your savings during retirement.