Because we at AgingOptions work in the arena of retirement every day, we sometimes assume that there are certain basic facts about retirement that everybody knows. But the truth is that millions of people approach retirement woefully uninformed, and for that reason they tend to make costly mistakes that can play havoc with their finances. A big part of our mission at AgingOptions is to help make certain that our clients, seminar guests and radio listeners are armed with the knowledge they need to plan wisely.
This helpful article came to our attention recently on the popular financial website Kiplinger.com. The article describes four government tax penalties that can take retirees by surprise – “costly government penalties retirees should avoid,” in the words of the Kiplinger article. As Kiplinger puts it, “Retirees facing the challenge of making their nest eggs last as long as they do are often surprised by the devastating impact that taxes can have on their cash flow. Although many people welcome the upfront tax breaks of contributing to traditional IRAs and 401(k) plans during their working years, they’re not so thrilled when Uncle Sam demands his cut when they start tapping those retirement accounts.” But income taxes aren’t the only unhappy surprise retirees can face. “Beware costly penalties or disincentives for acting too soon or too late or simply accumulating too much money,” the Kiplinger authors warn.
The first potential pitfall that surprises some retirees – although we’re not sure how anyone could be uninformed about this fact – is the lifetime reduction in payments that results when you file for early Social Security benefits. “The age at which you start to collect Social Security benefits has a big impact on the amount of money you ultimately get from the program,” Kiplinger says. “The key age to know is your full retirement age.” For most boomers, those born between 1943 and 1954, the full retirement age is 66. For those born in 1960 or later, the number is 67; and for the rest, those with birth years between 1955 and 1959, it’s somewhere in between. Plenty of retirees take Social Security at the earliest possible age, 62, but be warned: if you do, your benefit will be permanently reduced by up to nearly 26 percent. Not everyone understands how challenging this permanent loss can be to your retirement finances. (Another potential loss for those who file for early benefits is what’s called the Social Security Earnings Test. If you file early and are still working, you’ll lose one dollar in benefits for every two dollars you earn over the earnings limit, which is currently $16,920. This doesn’t apply once you reach full retirement age.)
The second unhappy surprise facing some retirees, says Kiplinger, is the tax penalty you’ll pay for failure to take out your required minimum distribution, or RMD, from your IRA and 401(k) accounts. (Roth accounts are not subject to RMD rules since you’ve already paid taxes on those dollars when they were deposited.) You need to start withdrawing funds at age 70 ½, and Kiplinger includes a link to a calculator designed to help you determine the amount of your RMD, but be forewarned: if you fail to take that distribution in time, your tax penalty could equal 50 percent of the amount you failed to withdraw. Talk about your unpleasant tax surprises!
The third area where some retirees are caught off-guard is failure to sign up on time for Medicare. Generally once you start Social Security you’re automatically enrolled in Medicare, and if you’re still working for a qualifying employer and receiving health benefits you need not sign up until you leave. Kiplinger describes some of the specific details, but in general if you fail to sign up on time and aren’t exempt because of your employment status, you’ll pay a late-enrollment penalty that amounts to a 10 percent surcharge of your Part B premium for every year you should have had coverage. That can really add up.
Finally, Kiplinger warns, many retirees are clueless when it comes to what is commonly called the Death Tax. “Die too wealthy, and the IRS will take one final swipe at your assets,” says Kiplinger. Right now the federal estate tax kicks in for estates worth about $5.5 million or more (about $11 million for couples). But even if those high dollar amounts are way beyond the value of your estate, you may not be in the clear – because the state where you live could also be waiting in line for a share of your legacy. Every state has different laws about estate taxes. Here in Washington State where AgingOptions is located, you can find estate tax filing thresholds and exclusion amounts on this table from the Department of Revenue. In short, estate taxes in our state generally don’t apply until the value of the estate exceeds $1 million – but you’ll need to consult a qualified financial planner to make sure you’re making tax preparations that are right for you.
As we said, these four tax and penalty pitfalls listed in the Kiplinger article, concerning Social Security, required minimum distributions, Medicare enrollment and estate taxes, shouldn’t really come as a surprise to anyone. The fact that they do surprise so many seniors tells us that too many people are failing to make proper plans for their lives as they age. If only they would do what thousands of folks in the Pacific Northwest have done and attend a free AgingOptions LifePlanning Seminar! If you’ll invest just a few hours with us, you’ll come away better informed than you ever thought possible about the facts you need to know and the plans you need to make concerning your retirement. Your finances, your legal protection, your housing choices and your medical coverage all need to work together – and with a LifePlan, they will. We even take into consideration the importance of involving your family in your decision-making so you’ll be assured that those closest to you will understand and support your wishes.
We invite you join us soon at a LifePlanning Seminar near you. Click here for all the details plus convenient online registration, or contact us for assistance during the week. Don’t go into your retirement years uninformed. Arm yourself with the best plan available – a LifePlan from AgingOptions.
(originally reported at www.kiplinger.com)