12 Don’ts (and Do’s) to Lower Your Taxes In Retirement

Not knowing about RMD (Required Minimum Distributions)

“How the heck were we supposed to know that you have to withdraw certain amounts out of your IRA?”, said one retired couple facing a hefty penalty tax.

And no one could have said it better. The deal goes this way: if you have money in a formal retirement plan like 401(k)s, 403(b)s or traditional IRAs, you have to take distributions. The amount you must withdraw is determined by a formula based on your age and your account balance on Dec 31st of the prior year.

The older you get, the higher percentage of the remaining balance you have to withdraw every year. If you don’t do that, you can owe a penalty tax of up to 50% of the amount you were supposed to take!

Not withholding tax on social security & pensions

No one wants to reach retirement and be taken aback by how much they owe in taxes.

The main thing everyone should know is that most retirement income forms are taxable. Your pension income is taxable, your Social Security is taxable – not to mention that you’ll report interest, dividends and capital gains on every non-retirement accounts.

You’ll need to do a tax projection to estimate your taxable income and your tax rate, and make sure you have the right amounts withheld.