| NEW YORK
NEW YORK Jan 22 The baby boom generation is
moving into retirement with something no other generation has
had: huge tax liabilities.
With their savings concentrated in tax-deferred retirement
accounts like 401(k)s or individual retirement accounts, many
boomers will have to pay income taxes on most of the money they
live on. In addition, they are likely to find a high percentage
of their Social Security benefits taxable.
"It's kind of a new thing with current retirees," observes
Mackey McNeil, a certified public accountant and personal
financial specialist in Bellevue, Kentucky. "They love the tax
deduction when they are putting money in, but some have no
after-tax accounts at all."
Social Security benefits are taxed under a complicated
formula. For single taxpayers whose earnings, including 50
percent of their Social Security benefits, are over $25,000
($32,000 for joint filers), 50 percent of benefits get taxed.
Once that income rises above $34,000 for a single and $44,000
for joint files, 85 percent of benefits will be taxed. The short
version? "Unless your income is really low, you're going to pay
a tax on at least some of your Social Security," McNeil
It all adds up to a big headache for retirees, and
especially for those who are single - because they get kicked
into higher tax brackets at lower levels of income. A single
person whose income is in the mid-$30,000s could catapult
herself into a 46 percent marginal tax rate simply by
withdrawing an extra $1,000 or $2,000 from her IRA; that could
bump her into a higher income tax bracket and a higher level of
Social Security taxes. And that does not even include local and
state income taxes, which (though they do not often apply to the
Social Security benefits) can add an additional 8 to 10 percent
tax burden to those IRA withdrawals.
The biggest burden, of course, will be borne by people who
don't plan ahead: You can cut your retirement taxes considerably
with some careful pre- and post-retirement tax planning. Here is
how to manage:
- Learn to love the Roth IRA. Contributions to a Roth IRA
are made with after-tax money but withdrawals are not taxed -
that is a benefit that a long time horizon can enhance.
Contributions to a traditional IRA are made with pretax dollars
but withdrawals are taxed at income tax rates. You can convert
money from a traditional IRA to a Roth IRA; when you do that you
will owe income tax on the converted amount. It's good to
convert tax-deferred funds to Roth status during low-income
years, whenever they occur - pre- or post-retirement.
- Set an estate planning strategy early. If leaving money to
your kids is a big part of your retirement goal, know that
leaving them money in a Roth IRA is better than leaving them a
traditional IRA. The more you want to leave behind, the better
the Roth looks.
- Amass savings in a variety of tax buckets before you
retire. Of course, continue to feed your 401(k) account,
especially up to the level that your employer will match. But if
you qualify for a Roth IRA, max out that contribution as well.
It's good to have some investments in an after-tax account. Once
you retire, you will want all of those options available for
- Make long-term plans, especially after you retire. Don't
just plan your spending and your withdrawals year by year. Think
of them as five- or ten-year plans. That will enable you to
optimize your withdrawals to minimize your taxes.
Your spending in retirement may not be even-keeled. In some
years you may take big, expensive trips and buy new cars, others
might be more frugal. But keep those withdrawals steady to avoid
pushing yourself into higher tax brackets with tax-deferred
withdrawals during the expensive years, says McNeil.
- Take full advantage of the low tax brackets. In 2014, a
single person is in the 15 percent marginal tax bracket until
they have $36,900 in income, and then they are in the 25 percent
tax bracket until they hit $89,350. For couples filing jointly,
the levels are $73,800 and $148,850. Make sure you use up those
low-level brackets every year, suggest experts like David
Hultstrom, a Woodstock, Georgia, financial adviser.
For example, if you are a married couple who often hit high
tax brackets and expect to have only $50,000 of taxable income
this year, consider pulling an additional $23,000 out of your
tax-deferred IRA so it can be taxed at the low 15 percent level.
You can use that additional money to roll over into a Roth IRA,
leaving funds to accumulate there.
- Take advantage of lean times. Dan Thomas, an Orange County
CPA and personal financial specialist, recently helped an
unemployed client move almost $300,000 out of his IRA and into a
Roth IRA. Because the client had a spate of unemployment that
covered more than one year, most of the conversions were at a
very low income tax rate. "The timing was good," said Thomas.
"We were making lemonade out of lemons."
- Protect your tax breaks.Read more of her