eZ Advice

Advice that comes from experience and that fits your life!

  • Tax Tips for Retirement:
    When the big day finally arrives, you’ll have to learn a whole new set of rules about:
    • Rolling over your 401(k) to an IRA
    • Tapping your pension
    • Tax-smart ways to handle company stock
    • How Social Security benefits are taxed
    When you retire, your life changes in many ways—and so do your finances. One of the biggest changes is that instead of contributing to tax-deferred retirement savings plans that reduce your tax bill, you'll start tapping those savings to provide income and pay taxes at your regular income tax rate
  • What to do with your 401(k):
    One of the first decisions you'll have to make is what to do with the savings that you have accumulated in your 401(k) or similar workplace retirement plan. As long as you have a balance of $5,000 or more, you can keep it with your former employer. You might want to do that if you like the investment choices and low fees in your employer's plan. And if you are at least 55 when you retire, you can start tapping your 401(k) funds penalty-free (but not your IRA), although you'll still owe income taxes on your withdrawals. If you roll the money over to an Individual Retirement Account (IRA) you'll have more investment choices, but you must be at least age 59½ to avoid early withdrawal penalties.
  • Rollover to a traditional IRA:
    If you decide to roll over some or all of your 401(k) money to an IRA, you can preserve your tax deferral by transferring the funds directly to a new custodian, such as a broker or mutual fund company. Don't make the mistake of having a check made out to you. If you do, your employer will be required to withhold 20 percent of the balance for federal taxes. You have 60 days to get your money safely into an IRA, but you will have to come up with that 20 percent that was withheld by your employer. Any money that's not in an IRA within that time period will be treated as a distribution and subject to income taxes plus a 10 percent federal penalty if you are younger than age 59½. Many states assess their own taxes and penalties on top of the federal amounts. You can avoid this potential problem by asking your retirement plan to send the money directly to your IRA or having them write the check to your IRA custodian. .
  • Company stock:
    If you own highly-appreciated company stock, special rules for what's called Net Unrealized Appreciation (NUA) can result in significant tax savings. When you take a lump-sum distribution from your 401(k), you can move the stock to a taxable account and roll over the balance of the 401(k) to an IRA. You'll pay ordinary income taxes on your basis in the stock you shift to the taxable account—that's the amount you paid for the stock—but the remaining NUA (the appreciation while the stock was in your retirement plan) will be taxed only when you sell the stock. And, here's the kicker: When you sell the stock, the profit will qualify for the long-term capital gain rate. In contrast, if you roll over your entire balance to an IRA, all of your withdrawals, including those that come from the profit on your company stock, will be taxed at your top tax rate.
  • Mandatory distributions
    Tax deferrals on retirement savings don't last forever. Generally, you must start taking distributions beginning with the year that you turn 70½. The money must be taken out by April 1 of the year after you turn 70½ and annual withdrawals by December 31 of each year. (There is an exception if you are still on the job at age 70½ or beyond. You don’t have to tap your 401(k) funds until you retire, but you will have to take annual distributions from your IRA even if you are still working.) RMDs are based on your account balance divided by a life expectancy factor set by the IRS and found in IRS Publication 590. If you don't take your full RMD each year, there's a stiff penalty—50 percent of the amount you failed to withdraw.
  • Important Note:
    You can always take out more than the minimum required amount from your account, paying taxes at your regular rate on all withdrawals. You can ask your retirement account custodian to withhold taxes from your distributions or you can make quarterly estimated tax payments.
  • Roth IRAs:
    If you've been stashing money in a Roth IRA, you can start reaping your rewards as long as you are at least 59½ years old and the account has been open at least five years. At that point, all withdrawals are tax and penalty free. But unlike traditional IRAs, there are no mandatory distribution rules, so you never have to touch the money if you don't need it. That means it can continue to grow tax-free for years. Your heirs will thank you because they, too, can take distributions from an inherited Roth IRA tax-free. (Money in an inherited traditional IRA is taxed as ordinary income to the heir.)
  • Roth 401(k) plans:
    If you contributed to one of the latest innovations in retirement savings—the Roth 401(k)—you can also benefit from tax-free distributions once you're age 59½. But the hybrid Roth 401(k) does have mandatory distribution rules, like traditional 401(k) plans, starting at age 70½. It's easy to get around that, though. Simply roll over the Roth 401(k) portion of the account to a Roth IRA when you retire. There will be no tax consequences, and you never have to tap the money during your lifetime unless you need it.
  • Convert to a Roth IRA:
    Once you move your retirement savings to a traditional IRA, you have another option: You can convert some or all of it to a Roth IRA. Although you will pay taxes on money you convert, all future withdrawals will be tax-free as long as the account is open at least five years and you are at least 59½ years old at the time. The longer the money sits in a Roth IRA allowing tax-free earnings to accumulate, the bigger the tax savings. As noted above, there are no mandatory distribution rules for Roth IRAs and if you decide to leave your Roth IRA to your heirs, they will inherit it tax-free as well
  • Social Security:
    Another big decision is planning when to start taking your Social Security benefits. Generally, you can start as early as 62, but your retirement benefits will be reduced by 25 percent or more for the rest of your life. Or you can wait to collect your full benefits when you reach the full retirement age, which is 66 for those born between 1943 and 1954. Full retirement age increases for those born in 1955 and beyond. The age is 67 for those born in 1960 and beyond. For each year you delay collecting benefits after the full retirement date up until age 70, you qualify for an even bigger retirement benefit.
  • Pensions:
    Pension and annuity payments from qualified retirement plans are fully taxable. As with Social Security benefits, it’s up to you whether taxes are withheld from your benefits as you receive them. Withholding can make sense if it lets you avoid making quarterly estimated tax payments. State tax laws vary. Some exempt certain types of pensions, such as military or government pensions, from state income taxes. Others allow a portion of any type of pension income to escape state income taxes. A few states fully tax pension income. You should get a Form 1099-R from the payer each year showing how much income you received.
  • Annuities
    If you purchase an annuity with non-qualified funds (money outside a retirement account), payments you receive will likely be partially tax-free. The portion of each payment that represents a return of your investment is tax-free; the portion that represents investment earnings is taxed in your top tax bracket. Again, you should receive a 1099-R from the insurance company showing the taxable amount.
  • Health Savings Account:
    Any distribution you take from an HSA and use to pay for qualified medical expenses is tax-free. Withdrawals for non-medical purposes are taxable and, if you are under age 65, will have a 10 percent penalty.
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