5 Tax(ing) Retirement Mistakes


When planning for your retirement, one aspect of retirement savings that you may have forgotten could end up costing you plenty. The effect that taxes have on your retirement savings and income is often overlooked, but it can mean all the difference to your level of financial security. In this article we'll take a look at five of the common tax issues you should be aware of to keep the financial luster on your golden years. (For more tips on saving for retirement, check out Annuities: How To Find The Right One For You.)

1. Understanding Growth, Income and Cash Flow

This is a distinction that can make a difference in your bottom line. Income is money that you receive and is subject to income taxes. Cash flow is the after-tax proceeds available to you to meet your retirement expenses. Growth is the earnings that you need on your savings and investments to ensure that you have enough income to last for your lifetime and to keep up with inflation.

In retirement, a key goal should be to minimize the impact of taxes on your income, which will increase the cash flow needed to meet your expenses, while leaving enough in your savings to give them the opportunity to grow at a rate sufficient to keep up with (or exceed) inflation.

2. Taking Required Minimum Distributions

If part of your savings consists of qualified plans, 403(b)s, SEP IRAs, 457(b) plans and Traditional IRAs, you must begin to take required minimum distributions (RMDs) each year, beginning the year you reach age 70.5. Failure to take the distribution can result in a penalty of 50% of the deficiency.

It is not uncommon to forget or neglect to take an RMD, or to miscalculate the amount and not take out enough. The RMD amounts for each retirement account must be calculated separately. However, if you have multiple Traditional, SEP and SIMPLE IRAs, the total RMD for these accounts can be taken from one or more of the accounts. Roth IRA owners are exempt from this requirement. (To learn more, see Strategic Ways To Distribute Your RMD.)

3. Minimizing Tax on Your Social Security Benefit

If the total of your adjusted gross income (AGI), nontaxable interest, and half your Social Security benefit is above a certain dollar amount based on your individual filing status, then as much as 85% of your Social Security retirement benefit may be subject to income taxes.

However, there are strategies that may be available to you to minimize the income tax on your Social Security, including changing your tax filing status and reducing your AGI by changing the type of assets you own.

4. Rolling Over an Inherited IRA

If you inherit an IRA or another qualified plan, you cannot rollover the account into an IRA you own if you are a non-spouse beneficiary. Only if you are a surviving spouse may you rollover your deceased spouse's IRA or qualified account into your own name. If you are not a surviving spouse, you can rollover the qualified plan account into an inherited IRA in your name (as beneficiary) and the name of the decedent, but only if this rollover option is permitted under the plan.

For IRAs, you can transfer the amount to an inherited IRA in your name (as beneficiary) and the name of the decedent. A spouse beneficiary also has that option, but can also chose to transfer the amount to his or her "own" IRA. (For more, see Common IRA Rollover Mistakes.)

5. Converting a Traditional IRA to a Roth IRA

A Roth IRA is a beneficial retirement asset because none of the earnings within the Roth are subject to income tax when withdrawn, if the distribution is qualified. The tax treatment of Traditional IRAs is just the opposite - with a few exceptions any earnings, as well as principal, will be subject to income tax when withdrawn.

However, any taxable amount you convert from a Traditional IRA to a Roth is taxable as income in the year converted. You could face significant income taxes if the amount you convert dramatically increases your taxable income. Before deciding whether to convert your Traditional IRA to a Roth IRA, consider the increased income taxes you will have to pay due to the conversion. (For more, see Tax Treatment Of Roth IRA Distributions.)


These points illustrate some of the more common tax issues that can affect your retirement if you're unaware of them or fail to take appropriate action. It is certainly not an exhaustive list. Retirement income planning is too important to approach without thorough knowledge of all the issues that can affect the financial aspects of your non-working years. If you haven't already done so, it may be time to consult with a financial professional to keep your nest egg safe. (For more, see Retirement Planning: Tax Implications And Compounding.)
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