For Mark Roberts’ Use: Retirement brings many changes to your lifestyle, daily schedule, finances, and more. And that’s certainly true for your tax situation! As you transition into your new life, watch out for these five tax situations that commonly trip up new retirees.
Taking your first distribution too early can cost you. If you retire earlier than expected, be forewarned that taking your first distribution from your retirement account before age 59 ½ could trigger a 10 percent penalty with the IRS. However, this penalty does not apply if you were forced to retire due to qualified disability, or if you had to withdraw the money to cover large medical expenses (in excess of 7.5 percent of your income).
Taking your first distribution too late is dangerous as well. You’re required to take your first distribution from a retirement account by age 70 ½. Otherwise, if you forget, the IRS will tack on a 50 percent penalty (half of the amount you should have withdrawn). Don’t delay your first distribution too late!
Healthcare subsidies can be tricky. Often, those who want to retire before age 65 must look for an affordable healthcare plan (because you’re not eligible for Medicare yet). One solution is to utilize the plans available on the state or federal health insurance exchanges, often with a subsidy that helps cover your premiums. But if your income was not calculated correctly to begin with, you might end up owing difference to the government when you file your taxes.
If one spouse is still working, be careful. When one spouse retires and the other continues to work, this can change your tax situation a bit. Remember to fill out that W-4 form correctly, or else paycheck withholding will be inaccurate, possibly triggering an amount due when you file your taxes in the spring.
Deductions and credits can save you money. Now that you’re retired, your tax situation might have changed. Your available deductions and credits have probably changed, too, so work closely with an experienced tax professional to identify all of the tax breaks that are available to you.
And of course, remember to work with us regularly even after you retire. We can keep you informed about changes to your tax situation that can affect you moving forward.