asdfsdf
Tax time in retirement years can mean applying different approaches to maximize your return.

As you move into retirement, you may face many decisions about how much money to withdraw from your savings and which savings plans to tap into. How you choose to manage your savings and distributions will affect your total tax burden, so it is important to design a strategy that works best for your financial situation.

Working with a tax professional can help you find the best approach for managing your retirement income, but understanding the basics of how your money will be taxed will help you stay in control of your finances. Remember that you may need to rethink your past approach to filing your taxes now that your situation has changed. For example, it may be time to switch from itemizing to taking a standard deduction, or vice versa. Calculating the numbers both ways will help you see which approach will lower your taxable income.

There are many ways that retirees can save on their taxes, such as taking the Credit for the Elderly. You may qualify for this tax credit once you reach the age of 65, but only if your adjusted gross income is within certain limits. This means you may need some careful planning to maximize your tax-free income if you are close to qualifying.

Once you retire, you will typically have income from several sources, such as Social Security benefits and various retirement plans. Each type of income may be taxed in a different way, making it more complicated to sort through what you owe. Consider the following common forms of retirement income:

Social Security Benefits – The taxes on your Social Security benefits depend on your total income. To find out how much is taxable, you must complete the IRS “Social Security Benefits Worksheet” which is found in the Instructions for Form 1040. Social Security benefits may be tax-free or partially tax-free, but you won’t know until you complete the worksheet.

401(k) Distributions – Distributions from a 401(k) plan are fully taxable, because the original contributions were excluded from your taxable income.

Pensions and Annuities – Income from pensions or annuities may or may not be taxable, depending on whether your contributions were tax-deferred or made with after-tax money. Your plan administrator will send you a 1099-R form which should list the taxable portion of the distributions you received.

IRA Distributions – Distributions are fully taxable for a deductible traditional IRA and partially taxable for a non-deductible traditional IRA. Distributions from a Roth IRA are tax free, if your first contribution was at least five years before any distributions, and if you are over the age of 59 and a half.

When planning your retirement income and tax strategy, you should also keep in mind that some retirement plans have required minimum distributions. The IRS requires taxpayers to begin taking distributions from 401(k) and traditional IRA savings plans when they reach the age of 70 and a half. The amount you have to withdraw is calculated with your balance and the life expectancy figures published by the IRS.

With some advance planning and an understanding of how your distributions will be taxed, you can create a strategy which helps you minimize your tax burden during your retirement years. For personalized help, consider working with a local financial planner or tax professional.