For Immediate Release
Contact: Gigi Thompson Jarvis
Making Your Retirement Less Taxing
Washington, DC, (February 24, 2014) You’d think taxes would get a whole lot simpler once retirement rolls around, but the tax aspects of Social Security, 401(k) withdrawals and IRAs can get pretty confusing.
“I get a lot of clients asking me about taking money out of a retirement account, but seldom are they aware of the affect that has on the taxability of their Social Security benefits,” says Laurie Ziegler, EA, an enrolled agent with Sass Accounting in Saukville, WI. “Most of the time, if Social Security is your only income, it’s not taxable, and you probably don’t need to file a federal income tax return. But what a lot of people are unaware of is that they can be taxed on their Social Security if other income puts them above certain thresholds.”
If you are filing a joint return and you and your spouse’s combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. In this case, you can estimate your potential tax liability by adding one-half of your Social Security benefits to all your other income. Then, take into account any tax-exempt interest you earned, and exclusions from income such as savings bonds. If the amount is greater than the base amount for your filing status, a part of your benefits will be taxable. If you are filing a joint return and you and your spouse have a combined income of more than $44,000, up to 85 percent of your benefits maybe taxable, so instead of adding half your benefits to your other income, you would add 85 percent, and subtract nontaxable income. You can find the base amounts on the IRS website. It’s wise to consult an enrolled agent before such a transaction, because there are ways to minimize the tax impact, such as splitting a withdrawal between two years.
Which brings us to 401(k) plans: Many retirees are confused about the tax implications of withdrawing from them. Some of the options for your 401(k) are:
If you are not yet 59½ and find yourself in a financial bind, there are several courses of action that will enable you to avoid the penalties. 72(t) payments allow you to take substantially equal distributions based on your life expectancy for at least five years or until you are 59½ – whichever is longer. If you need a hardship withdrawal, it would be a good idea to check in with a tax professional to make sure you stay on the right side of the IRS. For reliable tax advice, find a federally licensed enrolled agent in your area on the searchable “Find an EA” directory at www.naea.org.