It’s important to know how tax rules differ in retirement, when your income is typically lower.
Even if you’ve done all your own taxes throughout your working life, it’s still a good idea to turn to a professional when you retire. Why? Because the rules are different in the golden years when your income is typically lower. You may also be drawing out of tax-deferred accounts and on assets loaded with capital gains and/or losses.
A professional can help you nab every potential deduction and tap accounts in accordance with the laws to help you avoid a bigger-than-necessary tax bite from the IRS. The general rule is to draw from your taxable assets first, then the tax-deferred, leaving the Roth individual retirement accounts (IRAs) as the last resort and the potential go-to fund if you have a heavy-income year, for example, because you sold property.
And remember this: Your income may be lower, but your tax bracket may not. The IRS looks at adjusted income, not gross income, and you may no longer have the same tax credits you did when you were gainfully employed. You also may not be spending as much daily on potential deductions—think lunch, transportation, software, etc.—that you did while employed. Sure, that’s less expenditure but also fewer deductions.
Here’s a quick list of things to think about:
We do have some recent good news for seniors: On August 19, 2022, President Biden signed the Inflation Reduction Act, which requires the federal government to negotiate prices for some drugs covered under Medicare Parts B and D starting in 2026. This new negotiating power expands to more drugs each year, is estimated to save Medicare $98.5 billion through 2031, and is expected to also reduce Part D premiums for seniors.
And starting in 2023, the law requires drug companies to pay rebates to Medicare if prices rise further than inflation for drugs used by Medicare beneficiaries. And by 2025, the law will cap annual out-of-pocket drug costs for Part D enrollees to $2,000, which could be particularly helpful for seniors with catastrophic health issues like cancer, hepatitis C, or multiple sclerosis.
In addition to reducing Part D premiums, the new Inflation Reduction Act is projected to dampen the rise in Medicare Part B premiums too. Remember that this will be very impactful because Part B premiums are automatically deducted from your Social Security checks.
Get your questions answered about retirement »
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
All investing involves risks, including loss of principal.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.