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In or Nearing Retirement? Steer Your Tax Strategy Forward

January 20, 2017
Pothole: Taxes near retirement

Dealing with taxes while working is one thing, but dealing with taxes while heading toward retirement is something completely different. Although the road to retirement may contain a few taxation potholes, if you keep your eyes open and your hands on the wheel, you can avoid them.

The retirement game is changing. No longer does retirement mean hanging out at home or on the golf course or joining a travel club. For example, you may choose to work part-time, and that can affect your taxes. Plus, the category of “near retirement” is changing as well, and can mean different things to different people. For example, you might wish to switch careers after the nest is emptied to fit your near-retirement lifestyle.

But these changes may require a fresh look at your family’s tax strategy as it relates to income, retirement savings, and dispensing your assets.

Stay in the Driver’s Seat as You Transition

“Retirees and near-retirees need to think about what types of income they are getting in retirement,” says Lisa Greene-Lewis, a certified public accountant and TurboTax blog editor. “If someone is doing consulting work and a spouse gets Social Security, that has implications because it could make that Social Security taxable.”

More retirees may be jumping into the on-demand economy, such as driving for Uber or Lyft, which means they’re subject to self-employment taxes, says Greene-Lewis. “But they’re also able to take deductions. For instance, if they are driving and purchase an SUV, they can get up to $25,000 in deductions for equipment they buy for their business,” she says.

The Other Type of RV—Retirement Vehicles

As you cruise toward retirement, what should you do with your 401(k) or 403(b)? If you’re still working, you can max out your retirement efforts, Greene-Lewis says. You can put up to $24,000 in these vehicles once you turn 50. Provided you have more than $5,000 in assets, as a near-retiree, you may be able to keep the plan with a former employer until the plan’s normal retirement age. If the plan has good investment choices and low fees, this might be an option.

You can also roll over a 401(k) to an IRA to keep the tax man away from it—but make sure the funds go straight to the rollover IRA account to avoid any money being withheld.

For those with a health savings account, any distributions from it to pay for medical expenses are tax free. At age 65, HSA distributions used to pay for non-medical expenses are subject to income taxes, but retirees can avoid the 20% penalty that applies to those under age 65 who use the money for non-medical reasons. Additionally, Greene-Lewis said those over 65 can deduct medical expenses if they amount to more than 7.5% of the person’s adjusted gross income.


As you move toward retirement, it may become time to shed some assets such as your home and maybe some of its contents, and that may have tax ramifications as well. You may have built up a lot of equity in your home, but if you’ve lived in it for at least two of the five years prior to selling it, you may not have to pay taxes on the profits. Greene-Lewis said tax laws allow a single filer to claim up to $250,000 in profit on a home sale with no taxes, and up to $500,000 for a married couple filing together. You should also consider any improvements made to the home, and deduct the amount from the gross profit to determine what’s called your adjusted basis.

And if you’re downsizing, you may wish to pare down the amount of stuff you own. According to the IRS, in general, you may deduct charitable contributions up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. You may want to spread out your donations over several tax years.

When you reach age 70 1/2, you must take your required minimum distribution from retirement accounts. However, you can also send up to $100,000 of that money as a qualified charitable deduction to a favorite charity and not recognize that income, according to Greene-Lewis.

The retirement and near-retirement years can be a time of great excitement, but tax obstacles need not be part of the drama. Keep your hands on the wheel and steer clear of the pitfalls.

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