Retirees Beware: 5 Distribution Missteps That Can Shrink Your Refund
Written by
Jennifer Taylor
Edited by
Rebekah Evans
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A tax refund can feel like a financial windfall. No one wants to shortchange their refund, but mistakes can hit especially hard on a fixed income.
Careful planning can ensure you don’t make these costly missteps. Put the following five distribution missteps on your radar, so you don’t inadvertently reduce your tax refund.
Also here are genius ways to lower your retirement taxes.
Failing To Withhold Taxes
Unlike a traditional paycheck, taxes aren’t automatically withheld from income sources like Social Security, IRA withdrawals and pensions, said Steve Sexton, retirement planning expert and CEO of Sexton Advisory Group. Instead you must elect to have taxes withheld or pay the IRS during tax season.
“I recommend my clients revisit their withholding annually or after any income changes, so they’re not surprised when tax season comes around,” he said.
Poor Pre-Retirement Tax Planning
Retirement brings a whole new set of tax challenges, Sexton said. Therefore, improper tax planning can create a higher-than-expected tax bill, inadvertently lowering your refund.
Strategic tax planning may allow you to take advantage of opportunities to reduce your tax bill that you might otherwise miss out on. For example, he said those who are charitably inclined could qualify for Qualified Charitable Distributions — a tax-free distribution made by an IRA trustee directly to a charity, according to the IRS.
Using the Wrong Accounts in the Wrong Order
There’s a method to using multiple retirement accounts, Sexton said.
“For example, tapping tax-deferred funds too aggressively while leaving taxable or Roth assets untouched can unintentionally accelerate taxes,” he added.
A lack of planning is the consistent thread among tax missteps, which can cause you to lose thousands of dollars over time, he said. Consequently, he said tax planning needs to be treated as a year-round exercise — not something you do once per year.
Missing Required Minimum Distributions
When you reach age 73, you must start taking a required minimum distribution (RMD) from many types of retirement accounts each year — i.e., IRA, SEP IRA, Simple IRA — according to the IRS. Failing to keep track of these timelines can cost you, said Gene Bott, certified public accountant (CPA), tax advisor and partner at Tax Hive.
“It’s critical to know those requirements and take distributions accordingly or you’ll pay unexpected taxes for failing to withdraw enough,” he added.
Choosing the Wrong Filing Status
Getting your filing status confused might be easier than you realize.
“This most commonly hits a widow [or] widower shortly after their spouse passes away,” Bott said. “Many taxpayers start filing as single, unaware they can often file as married in the first year and as a surviving spouse in the following two years.”
Given this, if there’s any doubt about your filing status, always double check to see which category you fit into.
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