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Tax Tips For Retirees And Those About To Retire

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SUNNYVALE, Calif. (11/26/13)--Tax filers will find that what they've done with their finances during 2013 will be important come April 2014. The implications can be significant for retirees and for those about to retire (Yahoo Finance Nov. 20).
Use these tax-saving strategies to protect your money now and to increase income throughout retirement:
  1. Consider converting a large Individual Retirement Account (IRA) to a Roth IRA. Converting makes sense for a number of reasons: A Roth has no minimum distributions; when you withdraw, it's tax-free; and on conversion, you'll pay taxes at a known rate as opposed to an unknown future rate in retirement.
  1. Reduce taxable income by taking advantage of the catch-up.  If you're older than 50, you can make additional catch-up contributions into your traditional IRA and your 401(k) to reduce current taxable income.
  1. Get ready to pay estimated taxes. Once you start receiving pension payments and taking IRA withdrawals, you'll be responsible for taxes--no more automatic withholding. If you don't pay estimated taxes or pay them on time, you could be surprised by a big tax bill in April and even a penalty for underpayment.
  1. Take Social Security strategically. If you plan to take Social Security the year you retire, take into account the income you'll have earned so far that year. Those earnings might push you over the limit and result in taxes on your Social Security. Waiting until the next year to claim Social Security could remove that threat.
  1. Rebalance your portfolio. The market upheavals of the past several years have dramatically changed many investors' asset allocations. Your stocks might be worth more, resulting in a higher capital gains tax than you intended.
  1. Take your required minimum distribution (RMD) on time. You must take a minimum distribution from your IRA and other tax-deferred accounts if you're 70½ or older, or face a big penalty. If you fail to withdraw the full amount of an RMD by the deadline, the amount not withdrawn can be taxed at 50%.
Don't stop planning. Tax laws change every year and might affect you. Revisit your tax and financial-planning assumptions to make sure they are still accurate. For example, the old rule of thumb about how much you should withdraw from your retirement savings each year may no longer apply. After the financial crisis, 4% a year might be too much--3% might be a more sustainable amount.

Meet with a trusted financial adviser to make sure the decisions you make and the investments you hold are appropriate based on your risk tolerance, goals, and time frame. For related information, read "Four Key Steps to 'No Regrets' Retirement" and "Retirement: More to Prepare Than Finances" in the Home & Family Finance Resource Center.