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TheStreet Open House

Middle-Income Americans Lack Understanding Of Retirement Tax Impact, New Study Says

Stocks in this article: CNO

CHICAGO, April 9, 2014 /PRNewswire/ -- A majority of our country's middle-income Boomers and retirees have significant gaps in their understanding of how federal taxes will impact their retirement finances, according to a new study released by the Bankers Life Center for a Secure Retirement ® (CSR).

Retirement Tax Study Infographic

In fact, today, more Americans have an accurate understanding of how lottery winnings are taxed (94%) than the mainstays of their retirement income: Social Security benefits (39%) and retirement accounts, such as traditional IRAs (35%), Roth IRAs (31%) and 401(k)s (29%).

The Retirement Tax Considerations for Middle-Income Americans study, which focused on 1,000 Americans ages 50 and older with an annual household income of between $25,000 and $75,000, found that respondents also share a dislike for doing taxes and filing their personal returns. 

Tax Filing AssistanceWhen asked to choose which activity they disliked the most, respondents say that doing taxes (23%) is almost equally as disliked as the unpleasant experience of going through airport security (29%).  In fact, getting a flu shot is preferable to doing taxes for many middle-income Americans over age 50.

However, when it comes to completing and filing their annual tax returns, only four in 10 (38%) work with a tax preparer.  More than half (54%) prepare and file their own tax return, with one in three (31%) using tax-preparation computer software.  Nearly one in five (18%) complete their tax returns on their own without any external advice or guidance. 

Retirement Account Guidelines and Penalties401(k) plans and traditional IRAs are a popular way to save for retirement but a large percentage of older Americans are unaware that significant tax penalties apply when rules governing these accounts are not followed.  More than half (57%) do not know that 70½ is the age at which required minimum distributions from traditional IRAs and 401(k) plans must begin. 

Furthermore, a majority of the respondents are unaware that in certain circumstances they may be able to withdraw funds from a traditional IRA without penalty. Among the exceptions are:

  • To pay for health insurance while unemployed
  • To pay for college expenses
  • To buy a home
  • To pay for medical expenses

Only 2% of respondents were aware of all four exceptions.

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