Some Tax Saving Tips for the Retired

Many people spend a large percentage of their time searching for strategies and trends in the market that will help them earn more money at a faster way. More often than not, too much time and energy is spent on this task that people forget the fact that the more money they earn, the more will be taken by the IRS. It's important to be keen on how you can save from your taxes, and this is especially essential when you retire.

One of the worst examples is Social Security. During all those years of work before retirement, you are paying taxes into social security. Sadly, there is a high probability that you will be taxed on your social security benefits if you have not been diligent in your tax obligations. In fact, if you have at least $34,000 as yearly income from social security benefits, 85% of this income is considered taxable. Obviously this is not an attractive situation for retirees relying on a fixed income, who thought they were done dealing with IRS issues when they stopped working.

To avoid getting into this scenario, you might want to convert your traditional IRA to a Roth IRA. The latter will allow you to have non tax -deductible withdrawals.  As with anything else, there are some criteria that have to be met before you qualify for a Roth IRA, but if you meet those, then it's worth a try. On the other hand, you will now be required to pay taxes on the entire converted amount. Depending on your case, you might be obligated to pay large amount of taxes for this. Still, many people consider this as a better choice.

You might want to reduce your taxable income to lessen the incidence of this problem. This can be efficiently done by selling off stocks that are in a taxable account and have also appreciated the least. You'll have a reduced taxable income as a result of lesser capital gains. Being able to subside by living on capital will give you better chances of qualifying for the 0% tax bracket. You just have to be careful with this so as to avoid potential IRS problems.

Believe it or not, spending your money soon after you have earned it is another strategy in saving up on taxes. Basically, if your money market account or CDs are getting interest, you may want to spend those earnings within the same year. You'll be obligated to pay taxes on that money whether or not you spend it, so don't forget that you have the option of spending it. To demonstrate, it's better to spend the 5% earnings (or $5,000) on a $100,000 principal rather than putting it up for IRA distribution. If you put that in an IRA distribution, it'll just be added to your overall total tax liability.

There are a number of simple money saving methods that retirees can implement at various points in their lives. Most of them do not take much effort to accomplish and will have a minor impact to a person's overall quality of life. However, the tax savings and extra money that isn't being given to the IRS will definitely have positive effects on quality of life during the retirement years.

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Originally posted 2008-10-18 19:47:55. Republished by Blog Post Promoter

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