A year after the Covid-19 pandemic, the world has changed. For starters, the IRS has extended the individual tax filing deadline for TY 2020 to May 17. (Read more here.) Congress has also passed pandemic-related legislation that could affect you and your taxes. Retirees need to know how these changes and other revisions may affect them going forward. Check out these five tax tips for retirees.
Spread the ticking tax time bomb
People forget that retirement accounts like 401 (k) s and individual retirement accounts (IRAs) are tax free, not tax free. You are required by law to begin withdrawals or required minimum distributions (RMD) at age 72 so that the government can collect those tax deferred.
Those withdrawals are considered personal income. If not properly planned, they can push you into a higher tax bracket, increasing your taxes for that year. Failure to withdraw the correct amount will result in a fine.
The CARES Act has suspended the RMD for 2020. The SECURE Act of 201
Convert to a Roth IRA – and do it gradually
The Tax Cuts and Jobs Act lowered tax rates to historic lows for individuals and businesses alike. Unfortunately, those low rates for individuals will expire in 2025. Most finance professionals expect taxes to rise to reduce that massive federal deficit. The best time to convert is when taxes are lowest.
One obstacle could be that the taxes on the withdrawals are due immediately. You want to pay those taxes while in a lower tax bracket. To reduce the impact on cash flow, you don’t have to do the conversion all at once – you can extend it over several years and spread the tax due over several years.
Consider a Qualifying Charity Contribution (QCC)
Those who need to take the RMD and don’t need the money can donate the money directly to a qualified charity thus avoiding the taxes. “If it doesn’t hit your bank account, you don’t have to claim that portion as income and it will still meet your RMD,” said Bryan Bibbo, principal adviser at JL Smith Group in Avon, Ohio.
The RMD can also impact your Medicare premiums, says Mike Repak, vice president and senior estate planner at Janney Montgomery Scott in Yardley, Pennsylvania. is used to calculate your Medicare premium. Keep that number lower and your premiums can stay lower. “
If you took out a loan for your 401 (k) …
… Pay it back sooner rather than later. The CARES law allowed account holders to borrow up to $ 100,000 from their 401 (k) accounts. Typically, the 401 (k) allows you to take up to five years to repay that loan. The Cares Act gave account holders an extra year. People taking out the loans because of pandemic hardship missed the stock market rise. Of course you pay for yourself with interest, but every day that the money is not invested, it does not grow. Since last year’s Covid market crash, shares are up about 20 percent.
Of all the tax tips for retirees, this is perhaps the simplest: file early. The sooner you file a file, the less likely you are to fall victim to fraud, Repak says. “People concerned about security should apply early and pay their taxes before the fraudsters have the chance,” he says.
Would you like other tax tips? View a previous position here.
Rodney A. Brooks writes about retirement and personal finances. His column is currently coming in US News & World Report. He has written columns on retirement for The Washington Post and USA TODAY. He has also written for National Geographic, Next Avenue and Black Enterprise magazine. He retired as deputy editor / personal finance and retirement columnist for USA TODAY in 2015
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