I saw a T-shirt recently that read "Unstressed. Refreshed. Inspired. Retired."
What a fabulous time in life! You have free days to play with your grandchildren, time to pick up old hobbies and no worries about climbing that corporate ladder.
But while you may no longer be sitting in finance meetings at work, you still have financial concerns at home. If you're relying on your retirement savings, you need to ensure you're making smart decisions. So you need to do some year-end tax planning.
The two biggest issues on retirees' tax radar screens are retirement plan distributions and Social Security payouts, so I'll tackle how to attack those matters, as well as give a few other tax-planning tips.
Donate those IRA Withdrawals
Beginning in the calendar year following the year you hit age 70 1/2, the IRS requires you to start taking a minimum amount of money out of your retirement accounts, like your IRAs, Keoghs and 401(k)s. You don't ever have to take the money out of your Roth IRA if you're lucky enough to not need it.
You need to make that withdrawal by Dec. 31. There are actuarial formulas that determine the exact amount of that the minimum distribution. Big note: If you have more than one traditional IRA, your minimum distribution is based on the total in all of your accounts, although you can take the money from whichever accounts you choose.
Just remember, those distributions are included in your adjusted gross income, so you'll pay tax on that amount.
But if you're charitably inclined anyway and want to avoid beefing up your tax bill, consider donating that required minimum distribution to charity.
President Bush signed the IRA Charitable Rollover into law on Aug. 17 as part of the Pension Protection Act of 2006. Now, for 2006 and 2007, individuals age 70 1/2 and above can make charitable donations of up to $100,000 from their traditional IRAs (and Roth IRAs!) without having to count the distribution as taxable income. Donations from 403(b) plans, 401(k) plans, pension plans and other retirement plans are ineligible for this bonus tax-free treatment.
Here's how it works:
The donation has to be wired from your IRA directly to the charitable organizations to avoid the tax hit. You can't touch the money.
Only contributions made between Jan. 1, 2006 and Dec. 31, 2007, are eligible for tax-free treatment.
Contributions must go directly to a public charity. That means donor-advised funds, certain private foundations, charitable remainder trusts and gift annuities do not qualify. So check your alma mater or favorite hospital to make sure it's a public charity before you donate.
You must get written documentation of your IRA rollover contribution your charity.
One last note on the IRA front: There are plenty of retirees who are forced into early retirement and get lump-sum payments of pension benefits and/or 401(k) plan accumulations, severance packages, stock options and other benefits.
Typically, you'd want to just roll all that stuff back into another tax-deferred account. But if you're not going back to work, your income tax bracket may be much lower, so it might make sense to start withdrawing some of that money. Talk to your adviser so you can make the best decision for your situation.
Strategies for Social Security
While I know you're not relying on Social Security to fund your retirement, you're still entitled to it.
So when should you start collecting? You can start as early as age 62, but you'll only get partial benefits until you hit the true retirement age, which is between 65 and 67 these days.
As an example, if you were born between 1943 and 1954, you can start collecting at age 62, but you'll only get 75% of your benefits. If you wait until age 66, you'll get 100%. People born after 1960 have to wait until 67 to get full retirement benefits (the full age of retirement has been increased since people are living longer).
Those benefits will be taxable to you if your income is above a certain level. Here's the technical rule: Your benefits will be tax-free if "your adjusted gross income plus half of your social security benefits plus all of your tax exempt income" is less than $25,000 for a single taxpayer and less than $32,000 for married taxpayers filing jointly.
So if you're going to start collecting your Social Security benefits, talk to your tax planner. It may make sense to sell stock next year or move some deductions into this year to avoid a big tax hit.
Just Give It Away, Already
Start giving money away while you're still alive and watch your heirs benefit from it. For 2006, you can give up to $12,000 to anyone without incurring a tax on your gift. A married couple can give $24,000 without incurring a gift tax. Just make sure you do it before year-end.
Then, if your grandchild is in college, consider paying his tuition outright. If you pay the college directly, there are no limits on how much you give, so incurring a gift tax is not a worry. And the best part is that you can pay the college and still give your grandchild $12,000. So you got all of that money out of your estate and didn't pay a cent in gift-tax. Very cool.
If your grandchildren are still young, consider opening a 529 college saving plan for them.Again, you can contribute up to $12,000 per year (or $24,000 as a married couple) without incurring a gift tax. And if you're really looking to get money out or your estate, you could make a lump-sum contribution of $60,000 ($120,000 for a married couple) without any adverse gift or estate tax consequences, provided you don't make any additional contributions to that account for the next five years.
Then, as long as the money is used for tuition, the withdrawals are tax-free.
So in the midst of bocce ball and spoiling your grandkids, be sure to analyze your tax situation before year-end.
You want to be able to enjoy your retirement and stay unstressed, refreshed and inspired.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
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