2 Last-Minute Tax Tips for Retirees
Written by
Heather Altamirano
Edited by
Amber Barkley
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While your lifestyle and priorities might change in retirement, so do taxes. Understanding how your taxes work in your golden years can help maximize savings and avoid costly mistakes.
While Tax Day is here, there’s still time to get last minute tax tips. Of course, speaking with a tax professional is always recommended, but here are two things to keep in mind before the end of the day that could save you money, according to finance experts.
Understand the Required Minimum Distribution Rules
The required minimum distribution refers to the amount of money retirees have to withdraw every year, starting at age 73, from tax-deferred retirement accounts like 401(k) plans and traditional IRAs, in order to avoid fees from the IRS.
“If you are past the age where you need to take your required minimum distribution (RMD) from your qualified plans like your IRA, not Roth, or 401(k), you’ll want to make sure you took what you needed to take for last year,” said Eric Mangold, CWS, founder of Argosy Wealth Management.
He added, “If you don’t take your RMD, there is a 25% penalty on what you were supposed to take. But if you correct this within two years and take what you are supposed to, the penalty may be lowered to 10%.”
It’s important to note that the rules have changed for RMDs as a result of the Secure Act 2.0. Here’s what Mangold suggested being mindful of.
- Starting Jan. 1, 2023, if you turned 72 after the year 2022, you wouldn’t have to start taking your RMDs until you turn 73.
- Each year, if you have a tax-qualified plan, like a 401(k) or IRA, you are required to take a portion of that account that you will typically be taxed on.
- If you have a Roth IRA or a brokerage account, however, RMDs are not typically required from those account types.
- The amount you need to take changes each year. It is determined by your prior end-of-year balance, and then it is divided by a life expectancy factor determined by the IRS.
- For example, if you had an IRA balance of $100,000 on Dec. 31, 2023, and your life expectancy factor is 26.5, your RMD for 2024 would be $3,773.58.
While you’ve missed the deadline to take your 2024 RMDs, it’s not too late to reduce the penalty by taking them now.
Know the Difference Between a Traditional IRA and a Roth IRA
It’s easy to confuse a traditional IRA and a Roth IRA, but there is a big difference, and Greg Stoller, master lecturer in innovation and strategy at Boston University’s Questrom School of Business suggested “understanding the idiosyncrasies between them.”
He explained, “For example, withdrawals from a Roth during retirement are totally tax-free.”
The rules are different for a traditional IRA, and Stoller advised that you “speak with a certified public accountant to determine — and understand — whether traditional IRA withdrawals are taxable or not.”
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