Individuals can face some unique tax issues as they get older and enter retirement. One of these special issues comes from the fact that many individuals have tax-deferred retirement savings accounts, such as 401(k)s and IRAs, as part of their retirement savings portfolio.
A person generally can start withdrawing from these accounts, penalty-free, once they hit 59 and a half years of age. Then, once they hit 70 and a half, required minimum distribution rules will generally apply to them. These rules mean that they have to withdraw at least a certain minimum amount from their tax-deferred retirement accounts each year, or else face hefty penalties. What the minimum withdrawal amount is determined by an IRS formula and will depend on things like how much money a person has in the applicable accounts.
So, when a person is in their elderly and retirement years, withdrawals from tax-deferred retirement savings accounts can be a major part of their overall financial activity.
Now, such withdrawals can have some big impacts on a person’s tax liability, particularly if the amount withdrawn bumps a person up to a higher tax bracket.
Big tax bills can pose challenges for anyone. However, they can be particularly challenging for individuals in retirement, as these individuals can be on a fixed income, which can make it so big financial shocks could be particularly hard to cushion and could derail their retirement plans significantly.
So, the tax effects of future withdrawals from tax-deferred retirement savings accounts are something individuals may want to think about and plan for before they reach their elderly years.
Now, sometimes, even when advanced planning was done, the special tax issues related to retirement lead to a retired individual facing tax problems. Such problems could include problems with paying tax bills they have been assessed. When an individual in their retirement years has developed a tax debt or is facing other tax problems, they may want to go to a skilled tax attorney for explanations of their options and guidance on pursuing such options.
Source: Bloomberg, “Boomers, It’s Time to Spend–and Pay Taxes on–Your 401(k),” Suzanne Woolley, June 27, 2016