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.
Getting older has its nuisances as your health starts to decline, eyesight and hearing can deteriorate, you start having aches and pains in unexpected body parts. However, it does have its perks. Some of those benefits are in the form of tax breaks that come as you get older.
Seniors have a larger tax deduction.
If you are over 65, you get a $1,550 higher standard deduction than someone younger. Furthermore, if your total income as an individual is less than $25,000, you do not pay any taxes on your Social Security. While above that, you start paying income taxes on half of your Social Security above $34,000, you still have 15% that remains untaxed. Even this is a nice little tax break over someone younger. The effect is that seniors pay less in income taxes per dollar of income.
Seniors can deduct medical expenses at a lower percentage.
If you are under the age of 65, you can only deduct medical expenses that exceed 10% of your income. However, when you reach age 65, that figure goes down to 7.5% of your income. What makes this a particularly good deal for seniors is the fact that your medical expenses also tend to increase when you get over age 65. This makes this a double tax break because the non-deductible percentage decreases when your expenses increase.
Seniors can earn more without filing taxes.
Another tax break for seniors is that an individual over 65 can earn $1,550 more than a younger person before they even have to file taxes. This means that you do not need to take the time or expense to file an income tax return unless you make more than $11,850 as an individual senior or $23,100 as a couple. While you still must file an income tax if you make more, this is still a significant benefit for most seniors.
Those 50 and older contribute more to retirement plans
If you are over 50, you can contribute $6,000 more to a 401(k) plan that is tax-deferred. Now, you do have to pay income taxes on what you withdraw, but deferment does give you a larger account to withdraw from. Consequently, if you are over the age of 50, you can contribute more to your retirement without paying taxes on it as you do so. This is a major tax break because it allows your account to grow even bigger than it would if you had to pay those taxes.
No more early withdrawal penalty at age fifty-nine and a half.
Once you reach fifty-nine and a half, you no longer have to pay the 10% penalty for early withdrawal. You can also avoid this penalty at age 55 on a 401(k) associated with a job that you just left. This is a significant tax break if you need the money at this time. You will have to pay income tax on any money you withdraw, but not having to pay the penalty can make a real difference. It is extra money that you do not have to withdraw from your account.
So yes, there are tax breaks for different generations. This is because as you get older your situation changes. Your income changes, your opportunity for income changes, your sources of income change. As a result, there are going to be tax benefits you get at some ages that you do not get at others. If you are younger, remember that most seniors do not get a mortgage deduction or the opportunity to deduct children. So, in general, various ages will get tax breaks that other age groups do not.
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.
For many people, the dream of traveling in retirement is strong. You may want to plan trips to see your adult kids and grandkids a few times per year, and likewise, you may have bucket list trips in mind. Because you do not have a job to rush back home to, retirement is an excellent time of life to travel more. However, many people do not properly budget for their trips. This inevitably means that trips simply do not happen or that financial stress makes them less enjoyable. Learning how to budget properly for your trips is essential if you want to enjoy them fully.
Add Traveling Expenses to Your Budget
The first step to take when planning for trips is to properly fund them. One of the easiest ways to accomplish this is to incorporate traveling expenses into your regular budget. Many retirees create an annual budget, and they break this down into a monthly budget. Even when retirees incorporate a line for traveling expenses into their budget, they often fail to allocate enough money for these experiences. Depending on your plans for various trips, a single trip may easily cost you several thousand dollars or more. If you plan to travel at least a few times per year, your budget will need to be adjusted accordingly.
Prioritize Your Trips
If you are like most retirees, you may have a lengthy list of desirable amazing destinations. However, you may only be able to visit a few of these destinations each year. Prioritize the trips that you wish to take so that you can cross those off of your list first. Remember to factor in costs for your trips to visit family with your recreational trips. Determine which trips that you want or need to take each year. This is essential if you want to properly allocate funds in your budget for all of your planned trips.
Research Expenses
The expenses for each of your planned trips will vary substantially. For example, you may have plans to drive to a few national parks and to take a trip to Europe a few months later. The Europe trip will be much more expensive. With both types of trips, you need to essentially create a detailed itinerary. Research accurate costs for each aspect of your trip to set a realistic budget. Remember to factor funds for food and gas.
Look for Savings
Seniors often qualify for special savings at restaurants, theaters, stores, hotels and more. When you begin planning each of your trips seriously, spend time analyzing all discounts available. Look for alternatives, such as staying at a different hotel that may offer a senior discount. Take advantage of senior discounts, but be aware that other discounts and savings may also be available. For example, you can travel during a non-peak season to save a substantial amount of money. You can buy plane tickets on non-peak days or in the very early or late hours of the day. These are only some of the many ways that you can potentially save hundreds or thousands of dollars on your trips.
Traveling may be one of your primary goals in retirement, but your dreams of taking amazing trips will not happen if you do not have money available. As you can see, you will need to budget properly for them in various ways have funds available for your trips. You can get started today by adjusting your budget and researching desirable destinations that you want to visit within the next year. By doing this, you can get the wheels in motion for taking exciting trips to amazing locations.
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.
