New York (AP) – Retirement is a time when individuals need to carefully consider their tax strategy. When deciding on factors such as 401(k) withdrawal amounts, timing, or when to begin taking Social Security, it is important to look at the entire financial picture. Talking to a tax professional before making these decisions can help avoid surprises and potentially save a lot in tax dollars. Withdrawing a large amount, such as to pay off a mortgage, could result in an increase in the percentage of Social Security benefits that are taxed.
Taking a large distribution from a 401(k) to pay off a house, for example, can raise your income bracket and result in 85% of your Social Security benefits becoming taxable. It is important to consider the impact that capital gains and withdrawals from retirement accounts can have on taxes. Withdrawing from a retirement account too soon may lead to penalties or unexpected taxes owed. Additionally, taking Social Security benefits earlier than necessary could result in receiving a lower amount every month compared to waiting until the maximum age of 70.
For taxpayers aged 50 and older, there is still the opportunity to make catch-up contributions to traditional or Roth IRAs for tax year 2023. These contributions are due by the tax return’s due date, excluding extensions. Making catch-up contributions can increase retirement benefits and decrease taxable income for the year. It is not too late for those about to retire to take advantage of this opportunity, according to Kathy Pickering, chief tax officer at H&R Block.
Overall, retirement planning in terms of taxes requires careful consideration of various factors to optimize benefits and minimize tax liabilities. Seeking advice from tax professionals can help individuals make informed decisions that align with their financial goals. It is essential to evaluate the potential impact of withdrawals from retirement accounts and Social Security benefits on tax obligations. Making catch-up contributions to IRAs can be a beneficial strategy for those nearing retirement to enhance their financial security in later years.
