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RETIREMENT PLANNING CONTINUED After making your company an integral part of your life for many years, you may now find yourself at the point when you can retire. However, retirement planning does not end when retirement begins. What you do next, and how you navigate the array of tax issues and regulatory pitfalls you may face, can make a big difference in the long-term success of your retirement plan. Here's a brief review of some of the more "taxing" issues you may encounter: Early retirement and early withdrawals. Early retirement has become a growing trend in recent years. However, there is one issue you should keep in mind. If you take withdrawals from your qualified plan assets before age 59½, you may be subject to a 10% income tax penalty. To avoid this penalty, you can elect to take your annual withdrawals in a series of substantially equal periodic payments. The payments must continue for at least five years, or until you reach age 59½, whichever comes later. There are a few circumstances in which early withdrawals may be taken without penalty (e.g., death, disability). From a retirement planning perspective, the penalty tax should not be ignored. Waiting too long. You must begin taking mandatory minimum withdrawals from your Individual Retirement Account (IRA) by April 1st of the year after you reach age 70½. (Distributions from your company-sponsored plan can be postponed until retirement if you continue working past age 70½, provided you are not an owner-employee.) If you ignore the mandatory minimum withdrawal, or do not take out enough from your IRA, you will be subject to a 50% penalty tax. The tax will be incurred on the difference between what you should have taken out of your IRA and the actual amount you withdraw. Your minimum withdrawal amount will be based on the previous December 31st balance, divided by your life expectancy (or the joint life expectancy of you and your spouse, if applicable). Working while receiving Social Security. If you receive Social Security and decide to continue working, a portion of your benefits may be taxable. Calculating the taxable amount is no easy matter. For more information, you can refer to Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits, or consult with your financial or tax professional. Previously, the law required Social Security income recipients between the ages of 65 and 69 to return $1 for every $3 earned in excess of a pre-determined earnings limit. Now, those who have reached full retirement age have no earnings limits. However, the "give-back" has not been completely eliminated. In 2005, those working and collecting Social Security benefits under full retirement age will lose $1 for every $2 earned in excess of $12,000. For those working and reaching full retirement age in 2005, $1 will be deducted for every $3 earned above $31,800 until full retirement age is attained. Therefore, it is important for anyone who is thinking about taking Social Security benefits while still working to understand the potential tax consequences and to plan accordingly. Where you live can make a difference. Some important taxation issues must be addressed when you select your retirement haven. Each state has its own rules on income, estate, sales, and property taxation. Your accountant can help you become familiar with the potential tax advantages and disadvantages of your retirement destination. Planning Continues through Retirement Your personal retirement plan most likely involved building a nest egg with regular savings over the years. However, once you reach retirement, your planning should not come to an end. While you will always benefit from maintaining a savings plan consistent with your changing goals and objectives, a consultation with your financial professional can be an important next step to help you ensure peace of mind for your long-term financial future. << Back |
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