You can spend a lot of time planning for retirement. However, you can still make mistakes and some are fixable and some are not, according to USA Today in “Social Security, IRA and tax mistakes to avoid when planning retirement.”
Here are the fixable mistakes:
Getting your buckets mixed up. You may have heard of the planning model that uses buckets to help you get focused. The money you save for retirement is either in a taxable, tax-free or tax-deferred bucket. When people get to the end of the year or into tax season, they tend to focus on putting money into tax-deferred accounts, especially if they are over 50 and making catch-up contributions. However, it might be better to put money away in taxable or Roth IRA accounts.
A Roth account will let you withdraw money tax-free. A taxable account may also let you withdraw money at good tax rates for capital gains and dividend income.
In 2019, the annual IRA contribution is $6,000, or if you’re 50 and over, $7,000. The annual contribution for a 401(k) limit and other employee plans is $19,000 or $25,000, if you’re 50 and older.
You may need the tax savings later, when tax rates may be higher, more than you need it now.
Another fixable mistake: your HSA (Health Savings Account). Contributions go in and out of HSA accounts tax-free, if they’re used for qualified medical expenses. The money also grows tax-free in those accounts.
Making your Social Security plan. There are smart ways to take Social Security benefits, and there are not-so-smart ways to take Social Security benefits. How can you figure out what works best for you? Ask for help from the people who know. That includes your CPA, estate planning attorney and financial advisor. You should also talk with the people at Social Security. If you can delay taking benefits until FRA (Full Retirement Age), your monthly benefit will increase up to age 70. Should you withdraw money from your IRAs before taking Social Security? It all depends on your retirement savings. However, withdrawing money from your IRA now would reduce future tax bills on the RMDs (Required Minimum Distributions) that begin at age 70½. Those distributions are taxed as ordinary income. If you’ve got large IRAs, RMDs might push you into a higher tax bracket.
Tax planning for the long-term. Do you stop thinking about taxes the minute your annual taxes are filed? Most people do, but that’s a mistake. Instead, start thinking about tax planning. Experts say consider the amount of taxable income over the next five to 15 years. Once you have a general idea of what that will be, start figuring out how you’ll avoid launching yourself into a higher tax bracket. There are many different tax strategies, and your estate planning attorney and CPA will be able to help with tax planning. However, there are also two fairly straightforward ones you can put into place yourself.
First, tax harvesting. This involves selling investments at a loss when you are in high-income years and selling investments that produce capital gains in low-income years. For instance, use a capital loss as an offset to ordinary income (up to $3,000 per year). If you have more than $3,000, it becomes a carry-over to future tax years. Selling investments that produce capital gains in a low-income year might make the difference between paying taxes at 15% instead of 20%, or even 0% rather than 15%. Check with your tax professional.
Next, using IRA or Roth IRAs. If you qualify to contribute to a traditional IRA in high-income years and a Roth IRA in low-income year, you get the best of both worlds. The first will let you reduce your AGI (Adjusted Gross Income). The second will let you reduce your future tax bill.
Reference: USA Today (March 30, 2019) “Social Security, IRA and tax mistakes to avoid when planning retirement”