3 MIN. READ
Health care in retirement is a big expense, and it could cost you a large chunk of your retirement money. Smart planning for health care ahead of time will help you better prepare to handle these retirement expenses. Planning a budget for health care costs and enrolling in a health savings account are two ways you can be ready to handle health care costs in retirement. (more…)
3 MIN. READ
As you planned and saved over the years of your working life, you might have also considered those in need. By year-end, you may have made enough charitable donations to qualified organizations to also enjoy the benefits of charitable giving. You felt good by doing good.
Now that you’ve retired, you can still take advantage of many charitable giving tax benefits. Here are some of the ways to do that.
Plan for giving
To start taking advantage of charitable giving during retirement, calculate your taxable income for this year and how much you can afford to give. You can use the standard deduction, which has increased considerably. You can deduct up to $600 in cash contributions to eligible organizations for the 2021 tax year. The maximum deduction for 2022 has not been determined but is likely to be either $300 or $600.
In any case, if you’re not sure how you’ll file or what your income might be, the best place to start is last year’s return. Unless your income or employment status has changed markedly, your prior year return is a good initial guide.
As noted, the IRS permitted standard-deduction taxpayers to deduct charitable donations of $300 in 2020 and $600 in 2021. The deduction should be available for 2022 gifts, although the IRS has not determined the allowable deduction.
Maximize your benefits
Here are other donation types which benefit not only the target organizations but also your own tax bill and pocketbook.
Qualified charitable distribution
You have the option to make a qualified charitable distribution directly from your IRA to the charity of your choice. By contributing directly from your IRA, you can avoid paying income tax on the distribution. It also works when you must take Required Minimum Distributions (RMD) but don’t need the distribution for your daily living expenses. You can contribute up to the full amount of your RMD avoiding any tax consequences on the RMD for that year.
Form 1040 instructions explain how to account for charitable deductions. If the contribution came from a non-deductible IRA, additional tax documents may be required. Consult your tax professional for additional information.
Charitable gifts of assets
You can also make charitable gifts of assets, such as appreciated stocks or bonds. You won’t have to pay capital gains taxes on those instruments. By donating them, you deduct their appreciated fair market value without raising capital gains by selling them to donate cash to the qualified charitable organization. This allows the amount you would have paid in taxes to stay with the charity, which doesn’t pay taxes.
Once again, you’ll want to consider whether the standard deduction makes this a useful strategy for you or not. If you’re not itemizing, a $300 or $600 stock donation won’t avoid a lot of capital gains taxes.
Donor-advised funds
If you’re planning a lot of charitable giving and have sufficient assets, you can consider creating a donor-advised fund. This method lets you make distributions to the charitable organizations of your choice. A donor-advised fund is a separate account operated by a qualified charitable organization, called the sponsoring organization. The account includes contributions made by various donors.
As the donor, when you make a contribution, the organization has legal control over it. However, you or your representative can still advise about the distribution of funds and the investment of assets in the account.
You can deduct a significant portion of your donor-advised fund contribution. However, you should know that the IRS is aware of abuses related to the use of donor advised funds. So, do your due diligence and talk to your financial advisors to find the best options for you.
Charity still begins at home
As you can see, retiring doesn’t mean you can no longer make contributions to qualified charitable organizations. In fact, with IRAs and other retirement vehicles, it can even be easier to make them.
Another benefit of retirement is that you can make a gift that most charitable organizations are desperate for in today’s busy world — your time. At the beginning of this century, one in four Americans volunteered. Today that number is far less, especially since the pandemic began. Think about ways that you can be of value, both as a giver and a volunteer or even a cyber-volunteer. You’re still feeling good by doing good.
3 MIN. READ
As you get closer to retirement, one question that may cross your mind is whether you still have to pay income taxes? This is a key question for retirees since typically they no longer earn a steady income. However, taxes are almost inevitable. So, with the proper planning, you can lower or potentially eliminate your income tax burden during retirement.
Taxes are certain
While retirement ends steady earnings and the daily commute to the office and never-ending Zoom meetings, one thing that remains unchanged is income taxes. Therefore, to plan properly, it’s important to understand what taxes you must pay when you are retired and what portion of your income is taxable. The following are some basics considerations:
- Some withdrawals from an annuity are taxable. An annuity is tax-deferred, which means you don’t pay income taxes until you begin withdrawing money. The IRS taxes withdrawals depending on whether you have a qualified or non-qualified annuity. Withdrawals from a qualified annuity are taxable. When you make a withdrawal from a non-qualified annuity only the earnings are taxable.
- Funds from a tax-deferred investment are taxable. 401(k)’s and IRA’s are tax-deferred investments. Contributions to a tax-deferred account are not-taxed while the opposite is true when it’s time to withdraw your money. When you start withdrawing from a traditional IRA, the taxable amount is based on earnings. Any money you from your 401(k) is taxable.
- Social Security benefits can be taxable. Retirees do not have a steady paycheck coming in, which means there are no federal tax, Social Security, or Medicare to pay. However, believe it or not, your Social Security benefits can be taxed. The taxable amount depends on any other retirement income you receive. According to the Social Security Administration (SSA), the IRS can tax up to 85% of your Social Security benefits.
How to lower your tax bill in retirement
Taxes in retirement could make up a large portion of your expenses, which is one reason to make sure you plan well. Although the part of your income that’s taxable varies, there are several tools you should be aware of that can help decrease or eliminate your taxes in retirement. As you begin your financial planning, consider some of the following strategies:
- Contribute to a Roth IRA. Think about opening a Roth IRA or, convert a traditional IRA to a Roth IRA. With a Roth IRA, you are not taxed on earnings or distributions in retirement. You must follow certain rules, for example, you must keep the account open for a minimum of five years.
- Set up a health savings account. Contributions to a health savings account (HSA) account are tax-deductible, and the earnings and withdrawals you make for qualified medical expenses are tax-free. Therefore, an HSA serves two important purposes in retirement: reducing or eliminating taxes and providing an extra income source to cover healthcare costs. For 2022, the maximum contribution individuals can make is $3,650. For families, the maximum is $7,300. Also, those aged 55 and older may qualify for an annual $1,000 catch-up contribution.
- Take advantage of untaxable income sources. For example, the proceeds you gain from selling your primary home are not taxable. The non-taxable proceeds from a home sale vary depending on whether you are single or married. You can also give some of your assets to family members to lower or avoid estate taxes.
Plan your retirement properly
Whether you’ve already started planning for retirement or are just about to start, it’s never too early or too late to talk to a financial advisor. A financial advisor will help you create a retirement plan that’s best suited for you and can provide guidance by adjusting your current investments. Whether you start early or late, you’ll find that discussing your financial situation with an experienced financial advisor is beneficial in planning for retirement properly. This is especially true with so many investment and retirement options, each with its own unique and often overwhelming tax rules. Contacting a qualified financial advisor will certainly help you figure out if you’re on the right track or if there are other better options available for you.
Learn more about how taxes can affect your retirement by attending one of our Retirement Planning 101 Classes.
The average individual spends less during their retirement due to a budget. The exception is giving to charitable causes. A study by the WPI (Women’s Philanthropy Institute) looked at how households in America spent money as they retired. The results revealed that both single women and married couples spent the same amount of donations on charities before and after they retired. The charitable giving of single men decreased once they retired.
The report from the WPI also showed both married and single women have less confidence regarding their financial health upon retirement than men. Their focus is not on outliving their savings. This fear is justified as women live considerably longer than men. There are numerous ways for both women and men, married and single, to donate to charitable causes without being concerned about running out of money. Using savings meant for retirement to make donations is most likely to cause the individual to outlive their savings unless they use proper care.
A much better way to use retirement savings is as a portfolio. This will generate a retirement income to last the life of the individual. One of the most important aspects of the retirement portfolio is the monthly retirement paychecks. These are guaranteed and will last for a lifetime. If the stock market crashes, this income will not decrease. These paychecks can then be supplemented with either yearly or monthly retirement bonuses. These may have fluctuations depending on the investment performance, but they will last for life.
When the portfolio is properly in place, charitable giving can be funded with these bonuses and paychecks. It is important to allow for charitable giving as part of the budget in addition to the other living expenses. This will enable the individual to give to charities while ensuring the person will not outlive their savings. There is another excellent method for planning to increase the effectiveness of charitable giving. Many individuals have concerns that the recent changes made to the tax laws may decrease their income and impact their charitable giving. Also, there will be a significant decrease in the taxpayers itemizing their deductions. This makes it harder to use the taxable income to make donations. Any individual age 70 ½ or above has another option. A traditional IRA can be used for a qualified charitable distribution, which will not be included in the taxable income. The distribution will also apply towards the minimum required distribution.
There is an annual limit of $100,000 for qualified charitable distributions. This cannot be funded from both 410 (k) plans and IRAs. If the 401 (k) plan contains substantial savings, these funds can be used for charitable giving by rolling over the savings into an IRA. The IRA platform must enable the individual to be able to write checks.
The report from the WPI also revealed that married couples and single women have a higher likelihood of volunteering once they retire than single men. There is a lot of research showing volunteers enjoy financial security and health benefits while providing their communities with substantial contributions. The documentation for this research is located in the Hidden in Plain Sight report prepared by the Center on Longevity located at Stanford. Anyone not currently volunteering may want to give some thought to pursuing this activity once they have retired.
Planning for both volunteering and charitable giving may be important when determining retirement planning. This will not only enable the individual to give something back to their community, it often increases the enjoyment of life.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
If you are like many people, you may easily spend hundreds of dollars or more on holiday gifts and related holiday purchases each year. Some sources (For example, Forbes)indicate that consumers may spend more money over the holiday season this year than they have in previous years. The cost of gifts is only one seasonable expense. For example, you may have plans to host a party, travel or decorate the house elaborately. When you are preparing to spend a large sum of money within a short period, financial planning is necessary. Some people may be thinking about taking money out of a retirement account to cover seasonal expenses, but this is not advisable for many reasons.
The Tax Penalties
When you take money out of your retirement account before the withdrawal date, you face the expensive prospect of having to pay an early withdrawal penalty. More than that, if you are taking money out of an account that used pre-taxed funds, you will also need to pay taxes on the amount of money that you withdraw. In some cases, this extra income that you are taxed on will bump you into a higher tax bracket. This can magnify the impact on your tax liability for the year. As you can see, it can be very expensive to pay for your expenses during the holidays through this type of funding.
The Impact on Your Financial Future
The impact on your finances is more far-reaching than simply having to pay a higher income tax bill. When you take money out of an account that was earmarked for the later years in life, you are decreasing the amount of money that you will have access to at that point. More than that, you miss out on the benefits of compounded interest, dividend reinvestment and other methods for growing your money exponentially over time. The impact on your financial security can be stunning. Because of these factors and the expected tax penalties, the actual cost associated with an early withdrawal may be much more substantial than what you may think.
A Better Solution for Shopping During the Holidays
Planning is vital to avoid taking money out of a retirement account in order to pay for holiday gifts, décor, travel plans and more. One idea is to begin setting aside money or even shopping for gifts several months ahead of time. By doing so, you are spreading out this expense over several months rather than several weeks. Layaway is available at some stores as well. You can also consider using credit cards or even different types of loans to pay for the expenses. Loans and credit cards do have fees associated with them, but you may discover that these are more affordable options to consider than dipping into your 401k or IRA. Remember that you can always downsize your holiday experience or buy more affordable gifts if you lack the funds necessary to pay for everything without reaching for your IRA or 401k.
Paying for gifts, travel, and more this season can be burdensome to your budget, and you need to approach this season with a solid financial plan. Rather than dip into a chunk of money that you have earmarked for your senior years, develop a better plan that may be more affordable for you over the long run. Before you start shopping and decorating your home, create a budget to know exactly how much money you will need. Then, create a feasible plan to pay for these expenses with ease.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
Internal Revenue Service has come with an initiative to assist elderly taxpayers. Tax Counseling for the Elderly (TCE) would feature individuals of 60 years and above only. There have been Cooperative agreements between IRS and relevant organizations that would work annually during the taxation period for the initiative’s success. Some community partners taking part include non-profit agencies, faith-based organizations, community centers and large employers. This in-place training, which provides free tax help will be initiated for low-income individuals who need assistance filing their tax returns.
IRS provides funds for organizations to compensate volunteers for some of their out-of-pocket expenses, including transport, meals and other expenses incurred during tax counseling assistance. From January 1st to April 15th of each taxpaying year, tax return preparation for the elderly will be conducted effectively. This, however, comes with maximum practice all year round with program activities that will ensure all the individuals to be sorted for the Federal Income Tax returns’ year.
On October 12
th, 2021, the IRS awarded $41 million for the TCE and Volunteer Income Tax Assistance (VITA) grants to organizations providing free federal tax returns. With over 379 applicants requesting over $70 million for the initiative, IRS awarded grants to 34 TCE and 300 VITA applicants this year. Visit
TCE Webpage or
VITA Webpage to apply for the programs or go to
IRS Tax Volunteers to view details on becoming TCE or VITA volunteer.
IRS has been the leading organization in offering tax returns services for our clients, thanks to the Comprehensive Customer Service Strategy (Section 1101) that guides our strategies to provide the best services. The act dictates that IRS should offer an in-depth system for customer service and submit the plan to Congress. Together with the program, updated guidance and training materials should be available to the public. The plan for action practices for customer services in the private sector should include online services, telephone call back and employee training.
The strategy’s main objective is to provide a dynamic, timely, logical, customized, and effective interaction with taxpayers. This is motivated by six long-term goals that come with the redefined taxpayers’ experience that should be achieved by the next ten years. The pillars include:
- Expanded Digital Services
The plan is set to modernize IRS Information Technology and provide an improved experience through digital channels. We will build on existing online accounts and create accounts for tax professionals and business taxpayers for an easier and more effective taxing process.
- Smooth Experience
Taxpayers will be automatically led to relevant resources to help them sort out issues. This is through a centralized point on the system that would create reports to make more informed decisions.
- Educate
IRS is willing to educate taxpayers on the importance of all services offered. This will be spread to other individuals who are not yet set in the system by providing proactive information on taxpayers’ needs and preferences.
- Community of Partners
In the ten years, IRS is set to bring together different firms and relevant organizations all around the globe, including the whole tax ecosystem, for a more significant impact.
- We are reaching out to underserved communities
An integrated system is to be brought up to account for inadequately served communities around the globe that have been left out of many privileges. It focuses on addressing common issues, Education, Communication, Clarity and limited access to products and services.
- Enterprise Data Management and Advanced Analytics.
IRS aims to manage its data securely and get the organization on board and propagate the data from various sources. This comes from a cross-enterprise understanding of customer’s experience, transpiring needs and expectations and operational data.
IRS went ahead and supported individuals during the Coronavirus pandemic. They did this by offering tax help, including health plans for individuals, families, businesses, tax-exempt organizations, and others who are financially affected by the crisis.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
