If you are part of the Baby Boomer generation, here a few things that can help maximize your tax planning and retirement strategy.
One of the biggest decisions is whether to wait for full retirement age (age 66) to collect Social Security, or start receiving earlier. Here are a couple of things to know about Social Security to help you plan for your future:
1. If you wait until age 66 (for taxpayer born ’43 through ’54) to start receiving Social Security, you will get your full benefit. Social Security income is totally tax free after age 66. Generally speaking, it’s best if you can continue working until age 65 and start receiving Social Security benefits at age 66.
2. You can start receiving Social Security benefits starting at age 62 (or age 60 if you are a widow or widower), though your benefits (income you receive) will be reduced. Social Security benefits may be completely tax free or partially tax free, depending on your total income prior to age 66. If you have sufficient funds to live on for retirement without needing Social Security, you might want to consider collecting now. However, if you don’t have enough saved yet, it might be best to continue working and not collect any Social Security income yet so that you can build up more benefits and save more for retirement.
3. Start collecting Social Security prior to age 66 and continue to work — Other incomes such as earned income from a job or other investments such as interest or dividends, rents, and capital gains, could cause some of your Social Security benefits to be taxed. Benefits are reduced $1 for each $2 earned above $14,160 if you are under age 66, and $37,680 on the year of full retirement age (age 66).
4. Receive Social Security and continue working after age 66 — In the years after full retirement age, which is currently age 66, none of the Social Security benefits you receive will be taxed. You can work and make extra money while not being taxes on your Social Security.
5. If you are a spouse that has not worked, or has low earnings, you can be entitled to as much as 50% of your retired spouse’s full benefit if it is higher than your own calculated benefit.
6. If you are at least age 62, divorced, and not remarried, and had been married to your ex-spouse for at least 10 years, you can collect Social Security benefits. Your ex-spouse benefits need to be equal or higher than your own to be eligible.
Other Retirement Planning Considerations
If you retire before reaching full retirement age, consider putting money into a Roth IRA. Since there is no age restriction for contributions (and distributions) to ROTH IRAs, this may be a good option for you if you expect to work past planned retirement age.
Remember to sign up for Medicare a couple of months before turning age 65. Generally, Medicare is a health insurance program for people age 65 and older. There are several options to consider, including using HMO or PPO private insurance plans approved by Medicare for coverage. Expect to receive information in the mail from Social Security about Medicare prior to turning age 65. You can also get more information online at www.medicare.gov, or contact Medicare by phone at 1-800-633-4227 if you have questions.
If you haven’t already, you should seriously consider estate planning now. Consider options like gifting, living trusts, and wills. Meet with a qualified retirement planner or attorney who can advise and set up a program for you. If you already have an estate plan, great! Make sure it is revised to reflect any assets you may have acquired after your last update.
Generally, the older we get in life, the more expense we have in medical cost. In the past you might have not had enough expenses to deduct on your tax return. However, you may want to hold on and track your receipts now as you might be able to take advantage of them. Things like medical insurance, surgeries, doctor visits, and prescription medicines that qualify as a medical expense may add-up for a tax deduction.
Like this and want more tax advice? As part of a series of tax planning strategies, we’ve broken down tax advice for specific age groups: Generation Y and Millennials, GenX’ers, those at the “Top of the Hill,” Baby Boomers and the Silver Foxes at or nearing retirement.
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Vincent Mangiapane, EA
Federal Analyst, Taxbrain