Five Tax Advantages of Retirement

Tax

Careful tax planning can provide retirees with significant opportunities for keeping more of their money. Here are five examples. (Consult a tax advisor to determine your best options.)

#1: Retirement Plan Contributions

People over 50 enjoy higher contribution limits for traditional and Roth IRAs, and 401(k)s. If you’re married, own an IRA, and your spouse is still working, he or she can contribute to your plan, in addition to their own.

#2: Business Expenses

Whether you consult for your old company in retirement or start a new one, remember: businesses, both full- and part-time, are great sources of tax deductions. You can reduce your business’s income by the reasonable expenses that come with running it, including business travel, equipment (like computers), and office space. If your venture loses money, you can often deduct the loss from other sources of income.

#3: Use RMDs for Tax Payments

Assuming your post-career business is profitable, you’ll have to pay tax on that income.

Instead of calculating and sending estimated tax payments to the IRS during the year—a requirement for the vast majority of the self-employed—people who are taking required minimum distributions (RMDs) from traditional IRAs can wait until December to take the distribution and ask their IRA administrator to hold back extra funds for taxes.

Tax money withheld from IRA distributions is considered “paid tax” throughout the year, even if done at year-end. This allows you to dodge the requirement (punishable with penalties if broken) to make estimated tax payments on self-employment income throughout the year—provided your RMD covers your total tax liability.

Of course, be sure you won’t need the RMD to meet living expenses during the year!

#4: A Vacation Home

If you sold recently your empty nest and moved to a vacation home, you might qualify for two windfalls within a few short years.

If you lived in the old homestead for at least two of the last five years you owned it, your profits on its sale were tax-free (up to some generous limits).

When you move into a vacation home you’ve owned for 25 years or more, and designate it your principal residence for at least two years, you can keep some of the profit on its sale as well, under IRS rules. (Consult your tax advisor to see if you qualify.)

#5: Give It Away

Many retirees use the gift tax exemption to help keep their tax hit as low as possible, especially those likely to owe estate taxes when they die. The gift tax exemption allows you to give up to $15,000 per year (at this writing) to as many individuals as you like—up to a lifetime total of $11.4 million. Married couples can give twice that amount.

Don’t let your generosity end with family and friends. By gifting items to a qualified charity—a car, boat, or plane, for example (cash donations are treated differently)—you can deduct the gross proceeds realized by the charity upon its sale of the item (provided you valued it at $500 or more when signing over the title). Note that such contributions are only deductible (under IRS rules) when you itemize. Remember, grouping contributions within a calendar year might help you reach the itemization threshold.

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Disclaimer

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity.

This blog does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors. It is important to review investment objectives, risk tolerance, liquidity needs, tax consequences and any other considerations before choosing an investment style or manager.

This material contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

Investing in securities, including investments in mutual funds and ETFs, involves a risk of loss which clients should be prepared to bear, including the risk that the full investment may be lost. There is no guarantee that you will not lose money or that you will meet your investment objectives.

Dividends are not guaranteed and will fluctuate. Dividend yield is one component of performance and should not be the only consideration for an investment. Investment advisory services provided by GW & Wade, LLC 93 Worcester Street, Wellesley, MA 02481.

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