5 Top Retiree Tax-Planning Mistakes

5 Top Retiree Tax-Planning Mistakes

Even if you’re used to handling your taxes, things change once you retire. Since what you’ve done in the past won’t be in your best interest any longer, it’s common to make mistakes, especially soon after retirement. Here are five common tax mistakes that every new retiree should avoid.

1. Too much tax loss harvesting.

Also referred to as tax loss selling, tax loss harvesting is when you sell an asset, like one of your stocks, in order to get a loss that will offset a gain from the sale of another investment. Retirees do this in order to avoid paying gains on investments they’ve just sold. However, you’re not going to get much of a benefit from a stock loss, especially the larger the loss is.

2. Not knowing how to roll over your retirement account.

Once you retire, you’ll be able to roll over your 401(k) into an IRA. However, you have to be careful when doing this. If the money doesn’t go right from the 401(k) to the IRA, you could end up having the funds considered taxable income. Make sure that the way you’re depositing your money into your IRA is avoiding a tax hit.

3. Taking too-small required minimum distributions.

While you may think that it’s best to take a small amount of required minimum distributions (RMDs), it may be better to take larger distributions. You probably think that taking limited RMDs will minimize the tax burden, but should you pass away, your beneficiaries could end up with a huge income tax burden on the balance of your IRA. Approach your RMDs in a way that will reduce the tax rate on your distributions.

4. Not having a plan.

At some point after your retirement, you’ll be able to start taking free-from-penalty distributions from your retirement accounts. However, without a long-term plan, even a rough one, you’ll have a hard time keeping your distributions proportionate. Keeping track of what you want to take out when will keep you in the tax bracket of your choosing.

5. Assuming that Social Security isn’t subject to income tax.

While most people think that Social Security isn’t taxable, in truth as much as 85% of your Social Security can be subject to tax. If you have minimal income, you probably won’t have to pay tax on your benefits. If you have more income, though, a part of your Social Security may be taxable. Your provisional income takes into account your adjusted gross income, not including Social Security; tax-free interest; and half of your Social Security benefits.

While submitting your taxes after retirement isn’t difficult, it will be new territory the first year after you retire. Knowing what is going to change is the best way to avoid common mistakes and do it right the first time. You can also consider speaking with an accountant who will be able to prepare you for tax challenges in retirement.


Yorkville Advisors, LLC is a privately owned hedge fund sponsor.


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