Preparing to retire can be intimidating. Most of us who have a few years to go before we start thinking about that might not appreciate it, but there are a lot of things to think about before you pull the retirement trigger. Housing, healthcare, Social Security, travel, and changes to your tax situation are some of the things that change as you move from your working stage of life to your "leisure" stage of life. So lets tackle some simple tax tips as you look forward to finally walking-the-plank of formally retiring.
1) Know your tax bracket. Most people don't know what their tax bracket is. It is important to know this, especially if you are considering part-time work or taking Social Security early, which may be impacted by an income increase or decrease in retirement.
2) Use tax tools wisely. I'm talking about investment tools such as Traditional IRAs, Roth IRAs, annuities, and other investment tools that have differing tax treatments. If you expect your income to change in retirement, discuss with your financial adviser and tax professional how to best utilize these tools to achieve your goals.
3) Don't let your income surprise you. Many people don't really know what their retirement income is going to be until they've left the workplace, which is a bit like driving blind. Know the road ahead of you, and take some time with your adviser to crunch the numbers and figure out how much your take-home will be, and whether it will be enough to live on throughout your entire retirement.
4) Know your key deductions (& credits). You should probably know whether you take a standard deduction or itemize, and how much your exemptions are worth. And don't forget to ask your tax pro about the variety of credits you may be eligible for that may reduce your tax bill. Every little bit helps.
5) Level your (tax) bracket. This implies paying some taxes in earlier years when you are in a lower tax bracket, or alternately delaying taxes until later years if you are in a higher tax bracket when you retire. Required Minimum Distributions (RMDs) on tax deferred retirement accounts can take an increasingly bigger tax bite later in retirement, often pushing the retiree into a higher tax bracket. Smoothing your tax bracket can potentially help avoid that scenario.
As you approach retirement, you should be able to bask in your accomplishments, not stress over all of the details. These are just a couple of things you may want to consider discussing with your financial adviser and tax professional to make your retirement a happier, and simpler, process.