Strategies for end-of-the-year tax planning for retirement
December 7, 2006
Have you seen the T-shirt that says “Unstressed, Refreshed, Inspired, Retired”?
It means that you are finally doing the things that you dreamed about while you were sitting in meetings at work all those years. You don’t have a worry in the world. Or do you?
If you are relying on your retirement savings, you need to make smart decisions. You need to think about year-end tax planning.
Now, that may not be as enjoyable as spending time with loved ones or going to Christmas sales, but tax planning should be on your calendar this month. Two big issues that retirees face at the end of the year are retirement-plan distributions and Social Security payouts. So let’s tackle them and see if you can save some money in taxes next April.
First, you can donate your IRA distribution to charity. Beginning in the calender year following the year that you reach age 701Ú2, the IRS requires that you start taking a minimum amount out of your retirement accounts like your IRA, Keogh and 401K plan.
You do not have to ever take money out of a Roth IRA, if you are lucky enough not to need it. You will need to take your mandatory distributions by Dec. 31 from the other plans. There are formulas to determine the exact amount you will need to take, but you can take more that the minimum. If you have multiple IRAs, the minimum is based on the total of all of your accounts, although you can take the distribution from whichever account you choose.
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Just remember, those distributions are included in your adjusted gross income, so you will pay tax on the amount. But if you are of a charitable mind and want to avoid some of the taxes, you can donate your distribution to your favorite charity. President Bush signed the IRA Charitable Rollover into law in August as part of the Pension Protection Act of 2006.
Now for 2006 and 2007, individuals over 701Ú2 can make charitable donations of up to 100,000.00 from their IRAs without having to count the distribution as taxable income. This only applies to IRAs and Roths, so charitable contributions made between Jan. 1, 2006 and Dec. 31, 2007 are eligible for this special tax treatment. Contributions must go directly to a public charity, and you must have written documentation that your IRA distribution went to that charity.
Another end of year tax strategy is deciding when to take your Social Security benefit. Should you take the reduced amount at 62, or wait to receive your full benefit at 66? Your benefits may be taxable if your income is above a certain level, so talk to a tax planner before you start to collect.
It may make sense to sell some stock next year or move some deductions into this year to avoid a big hit.
You can give your money away to your heirs, if you like. For 2006 you can give $12,000 to anyone without incurring a tax on your gift. A married couple can give up to 24,000. without incurring the gift tax. If you have grandkids, consider a 529 college savings plan. You can make a lump sum contribution of $60,000 ($120,000 if married) without any adverse gift or estate tax consequences, provided that you make no additions to that account for the next five years. As long as the money is used for tuition, the withdrawals are tax free.
Consult your CPA or tax preparer on these and other ways to save money on taxes at the end of the year.
If you would like to meet with one our our advisers to go over estate preservation, call us at 841-4277.
• Carol Perry, of Carol Perry & Associates, has been a Northern Nevada resident since 1983.