You’ve got it all planned out. Your retirement savings accounts are full, you have started receiving Social Security benefits and your pension is ready to go. Everything is planned. What could go wrong? Here are five surprises that can turn your plan on a dime.
- Health emergencies and long-term care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can also cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement accounts to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.
Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.
- Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.
Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.
- Your pension plan. Understand if your pension is in good financial health. Pensions will often offer a lump-sum payout option for you. Should you take it?
Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.
- Minimum required distributions. Forgot to take your minimum required distribution from your retirement plans this year? No worries, as it is not required in 2020. The tax bite, however, could be quite a surprise in future years as the penalty on the amount not withdrawn is 50%!
Tip: Select a memorable date (like your birthday) to review your distribution and take action so this tax surprise does not impact you.
- Future tax rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.
Tips:
- Create a retirement plan with higher state and federal tax rates
- Plan for increases in health care costs through Medicare
- Plan for more taxes on Social Security benefits
- Plan for higher capital gain and dividend taxes (now 20% versus 15%— By Nancy J. Ekrem, CPA
Managing Shareholder
DME CPA Group PC
Certified Public Accountants & Business Consultants
nekrem@dmecpa.com425-640-8660
Something to think about. My late wife had an Aunt who just quit paying her Federal income taxes the day her husband died because she didn’t understand the process and refused to pay someone to figure it out. She just threw away the forms when they arrived. This went on for well over a decade. (As an aside, she and her husband were avid life long Republicans and never missed voting). She was never contacted or questioned in any way by the IRS before her death. Her 2 children inherited over 1 million dollars in cash and property. Do you think we have a really good, fair and equitable tax system? I don’t. Maybe it’s time to just quit paying our state and local taxes until things change a little. Oh, that’s right, Trump and Republican Senate just fixed our Fed tax laws making everything more simple and equitable while cutting taxes in the process. As Ms. Ekrem points out above, the Fed. govt. spends over 1 trillion $’s more than it makes every year. Meanwhile the rich get richer as they say.
Property tax increases should not be forgotten when you retire. Through history when you have paid off your mortgage, the monthly payments are now more than your mortgage payments were because of taxes.