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

Not Choosing When to Withdraw Income

Withdrawals don’t seem like such a big deal, but doing it strategically will definitely change your income. For taxes on Social Security, for instance, one of the biggest tax mistakes retirees make is taking Social Security early while waiting to withdraw from IRAs and other retirement accounts until they are required to.

Why is this a tax mistake? Using your retirement money in the wrong order can mean paying thousands more in taxes each year than you would have to pay if you had rearranged things based on the strategy that would get you the most after-tax income.

Doing an IRA Rollover Wrongly

Let’s say you have $200,000 in a 401(k) and take it as distribution, but you don’t fill out the paperwork correctly. Your company withholds $40,000 in taxes from your funds (20 percent of the distribution amount). You deposit the net $160,000 it into an IRA within 60 days as an IRA rollover. But now you have to come up with an additional $40,000 to deposit into this IRA in order for the entire $200,000 to count as a rollover.

If you are under 59 1/2 years old and this happens to you, you will have to pay an extra 10 percent penalty tax too. Your best shot at avoiding making big tax mistakes is to rollover your funds correctly when you leave an employer.