Did you know that 94% of Americans have an accurate understanding of how lottery winnings are taxed, but only 29% understand how their 401(k)s are taxed?The truth is, many middle-income Americans have little knowledge of how federal taxes will impact their retirement savings. For example, more than half of Americans don’t know that age 70½ is when required minimum distributions (RMDs) from traditional IRAs and 401(k)s must begin. And 68% cannot correctly identify age 65 as when a higher standard of tax deduction is granted.
Not understanding taxes in retirement could result in you missing out on potential eligible deductions. More than 56% of middle-income Americans age 50 and older don’t know blindness is cause for a higher standard deduction, while 90% are unaware that they may be able to claim their parents living outside the household as dependents for tax purposes.
Not being tax savvy as you near or enter retirement could result in incorrectly estimating future income, paying penalties, missing allowable deductions and more. If you’re worried you may fall into these pitfalls, here are three tips to consider:
- Make tax planning a part of your retirement planning discussion. Keep up-to-date on articles and updates from the IRS at: https://www.irs.gov/individuals/seniors-retirees
- Understand legal exceptions to penalties for early or late withdrawals from your retirement accounts. Most middle-income Americans aren’t aware that they may be able to withdrawal penalty-free from traditional IRAs to pay for health insurance during unemployment, pay for college expenses, buy a home or pay for medical expenses.
- Talk to a qualified tax professional. Only 38% of middle-income Americans age 50 and older work with a tax preparer to complete and file their annual tax returns. A professional can help ensure you claim applicable deductions and credits.
As Tax Day approaches, take the next step in managing your finances by learning more about how federal taxes can impact your retirement savings!