This is just one mistake you might possibly make with your retirement money. Numerous other rules can create headaches as well, but you can avoid high taxes in retirement in a number of ways. You deposit the remaining $160,000 into an IRA within 60 days as a rollover, but now you have to come up with an additional $40,000 to deposit into this IRA in order for the entire $200,000 to count as a rollover. What if you don’t have $40,000 available to put into the IRA to make up for the tax withholding that’s already been sent to the IRS? That $40,000 is considered a taxable distribution from your account. You’ll have to pay taxes on it, even if you meant for it all to be an IRA rollover. That’s $9,600 in taxes at a 24% tax rate that you could have avoided. You’ll have to pay an extra 10% penalty tax, too, if you’re under age 59½. You’re required to withdraw a higher percentage of the remaining balance each year as you get older. You can owe a penalty tax of up to 50% of the amount you were supposed to take if you fail to do so. Required distributions can also apply to inherited IRAs and inherited Roth IRAs, even if you’re younger than age 72 or 70½. You could be in for a big surprise when you file your taxes in retirement if you don’t have the right amount withheld from your pension or Social Security income. You might consider speaking with a professional to do a tax projection to estimate your taxable income and your tax rate so you can be sure that you have the right amounts withheld. You might be able to convert some of your IRA to a Roth IRA and pay little to no tax if you’re experiencing a year where you have low income and high tax deductions, such as mortgage interest or health-related expenses. This can save you thousands of dollars, but it doesn’t happen unless you do your tax planning before the year ends. This increases to $125,000 if you’re married and filing jointly, although it plummets to $10,000 if you’re married and file a separate return. Find out if your company retirement plan offers the ability to make Roth contributions. It’s called a Designated Roth account through your 401(k) plan. Roth contributions are made with after-tax dollars, so they don’t reduce your current year’s taxable income, but your distributions come out tax-free when you withdraw the money. Roth IRA withdrawals aren’t included in the formula that determines how much of your Social Security income will be taxable, either. Learn the IRA rules and find out if you’re eligible to make a traditional IRA, non-deductible IRA, or Roth IRA contribution each year. Using your retirement money in the wrong order can mean paying thousands more in taxes each year than you would have had to pay if you’d rearranged things based on a strategy that would get you the most after-tax income. This is especially true if you have no pension and most of your retirement income will come from Social Security and IRA money. An experienced retirement planner can help with this kind of planning, and it can result in more after-tax retirement income for you.
