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Tax Planning and Retirement

Written by Eva Rosenberg on August 27, 2015 in Retirement  |   8 comments

When you’re preparing for retirement, one of the many things people think about is retirement savings. You’ve worked hard and invested for retirement, but you want to help ensure your money lasts as long as you need it. One way some people extend the life…

RetirementTaxDistributionsWhen you’re preparing for retirement, one of the many things people think about is retirement savings. You’ve worked hard and invested for retirement, but you want to help ensure your money lasts as long as you need it. One way some people extend the life of their savings during retirement is to plan their distributions in order to maximize tax benefits.

Here are six things to keep in mind when it comes to your retirement savings plan:

1) If you want to withdraw money before age 59 ½ for an activity that is exempt from early withdrawal penalties, you may want to consider moving your pension money into an individual retirement account (IRA) before making any withdrawals.

2) If you had previously taken any loans from your 401(k) plan (or a similar plan), you may want to consider repaying the full amount prior to retirement. If you don’t pay the 401(k) balance, the full amount will become taxable the year you retire—possibly with early withdrawal penalties—and you may not have the money to pay the taxes.

3) On the other hand, if you start a profitable business when you retire, you can establish a solo 401(k) plan for your business. Some retirees who choose this route will opt to roll over their pension and IRA funds and borrow up to $50,000 of those retirement funds without being taxed at all.

4) Prior to retirement, many people will make a plan to review their finances and all sources of cash flow well before retirement actually begins. This helps many people understand their annual cash needs, and avoid withdrawing too much money, not only is it a waste, but the taxes tend to be higher, and higher withdrawals could increase your tax bracket.

5) Consider coordinating your retirement distributions with your Social Security benefits. Be aware that your Social Security income will probably be taxed (though you may be able to plan your cash flow so it is not).

6) As many as 20 years prior to retirement, some people choose to gradually move IRA and pension money into Roth IRAs. Doing so gradually has enabled some people to realize lower taxes and fewer to zero penalties. After age 59 ½, some people pay no taxes on these funds at all.

Taking money from retirement accounts

One of the most heartbreaking types of letter that I receive is from people who have withdrawn money from their 401(k) or other retirement plan for a down payment on a new home, education expenses, or medical expenses while unemployed.

You may want to try to avoid doing this at all costs as there is a triple whammy on these distributions. You pay taxes on the funds you withdraw, and if you’re under age 59 ½, you also pay the IRS a 10 percent early-withdrawal penalty plus the state penalty. Additionally, the fund administrator will withhold 20 percent of your withdrawal, so in the end you’ll pay taxes and penalties on money you don’t receive.

This usually comes as a big shock to people.

Another shock: When money is withdrawn from IRAs and pension accounts, only 20 percent is withheld for federal taxes, and nothing is withheld for state taxes. These distributions can push you into a higher tax bracket or cause you to lose certain credits or deductions, if you’re not careful, and you could wind up owing a lot of money.

I have found that smart retirees often have more disposable income in retirement than they did when they were working. You may want to enlist the help of a tax professional or a financial planner who can help you navigate the world of retirement tax planning.

Eva Rosenberg, EA, is the publisher of TaxMama.com®, where your tax questions are answered. She teaches tax professionals how to represent you when you have tax problems. She is the author of several books and e-books, including Small Business Taxes Made Easy. Follow her on Twitter: @TaxMama

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.


  1. David says:

    Quoting from the article:
    “You may want to enlist the help of a tax professional or a financial planner who can help you navigate the world of retirement tax planning.”
    Especially before you follow any advice in paragraphs 1, 3 and 6.

    For example, in number 1, the author says “you may want to consider moving your pension money into an individual retirement account (IRA) before making any withdrawals.” This will not save you any money on taxes. None. Zero. Qualified distributions from pensions and Traditional IRAs are both subject to income tax. Additionally, making a transfer from a pension plan to an IRA could subject you to sales charges. There are good reasons to do transfers or “roll-overs.” This is not one of them.

    I was going to stop, but the advice here is so bad I have to continue.

    Number 3: The author says “…if you start a profitable business when you retire, you can establish a solo 401(k) plan for your business.” I can’t think of a good reason why to start a solo 401k retirement plan when you’re *retired*, let alone one with the expenses of a 401k. The purpose of a retirement plan is to grow money and defer taxes until you’re retired. Furthermore, if your business is *profitable* that means it’s generating income. There is absolutely no reason to borrow the money when you have a profitable business and you are free to take distributions after age 59 1/2. Again, transferring funds into new accounts may subject you to sales charges.

    Number 6: Transferring money from pensions or IRAs to Roth IRAs means that you will have to pay income taxes on the amount of the transfer. As long as a person doesn’t exceed the income limit, it’s far smarter to just contribute to a Roth IRA. Further, distributions from a Roth IRA are tax free after age 59 1/2. For everyone. Not just “some people.”

  2. Anonymous says:

    Good advice thank you

  3. Mayra says:

    Good post on tax planning in retirement. Before doing tax planning, take a look at your retirement expenses. If you are planning retirement in too early stages then be a smart tax planner. Even, now You can Calculate Income tax through Big decisions before making any planning.

  4. Divakar says:

    When you retire your life changes in many ways and according to that your finances changed. So, you start saving in early stages and sooner you get started, the more chances of reaching your retirement goal. You can start with lower savings in the initial years but have to increase gradually as you near the retirement age. You can take experts advice for planning of your investments.

  5. retirement planning advisor Henderson says:

    Thank you for your post!This tutorial is fabulous! Lots of great info including, but as soon as you can. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. Retirement Planning Advisor say that’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.

    • EFX Moderator says:

      Thank you for your comment, we’re glad you found the information helpful. Best of luck in your financial future.disabledupes{ec8b7d8b8a99b57845fab3e9f2c46def}disabledupes

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