Income Taxes in Retirement

United States tax forms

As a volunteer tax preparer with VITA (Volunteer Income Tax Assistance), I frequently wish people understood taxes better. In recent weeks I’ve done three tax returns for people who, in their first year of retirement, cashed out their entire IRA or 401(k) account (ranging from $15,000 to $60,000).

In most cases, these new retirees used the funds for their long-term benefit – major home improvements and other purchases that will help them in the long run. I think they probably thought about the fact that spending the money now means they’ll live on more limited income for the rest of their lives, and they decided that was okay with them.

But I do NOT think they understood the tax implications of their decision, and I found myself wishing I would’ve had the chance to explain it all before they decided to withdraw the whole amount at once. Here are some things retirees should know:

  1. Withdrawals from “traditional” IRA, 401(k), and similar retirement plans will generally be included in your taxable income. Large withdrawals can easily move you into a higher tax bracket, meaning that you pay a higher tax rate on some of that income. For a single person, income above about $53,000 is typically subject to a 22% tax rate, rather than the lower 10% or 12% rate.
  2. The first year of retirement is especially tricky for income tax purposes, because usually the person also had employment income for part of the year, which may contribute to bumping them into a higher tax bracket.
  3. Social Security income is only partly taxable (at most 85% of it is subject to tax). How much is taxable depends on how much other income you have that year. When a person has very low income, none of their Social Security income will be taxable; as their income increases, the portion of Social Security subject to tax also increases. That means that large withdrawals from retirement accounts can create a double-whammy by increasing the taxable amount of Social Security as well has increasing total income.

I know that some of the clients I served paid at least $5,000 more in income tax than they would have if they had spread their retirement plan withdrawals over five years, or even over two or three years. I’m also pretty confident that they did not really understand the tax impact when they made the decision to withdraw it all at once.

Bottom line? Before making decisions about withdrawing from retirement plans, consider various options and get information from someone who is knowledgeable about taxes. If you don’t have a tax expert to ask, try using IRS form 1040-ES (estimated taxes) OR the IRS online withholding estimator to compare different options. Note: remember to consider state income taxes, as well.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Checking My Credit Report

My New Year resolution is to pick one of the three credit bureaus and request a credit report. I’ll be able to read the full report online, sometimes immediately. Because 80% of us do not follow through and accomplish our resolutions, this one will be a winner.

Credit reports can surprise you. I have found accounts listed that I thought were closed and older ones still listed.  Some active loans in repayment are not listed. 

Accounts listed on the report, will include contact information.  I have used the address to write and ask for the account status to be updated. (Keep a copy of the letter for your own records).  I have also written lenders and asked them to report my loan history to the credit bureaus.  If you have a thin report, very little credit use, asking a landlord, bank, or store to report your history of payments can enrich your report and result in more favorable interest rates and loan terms.  New offer credit cards are averaging 19.21%.  Individuals with a track record of using credit and an excellent credit score may be able to land a card with a 15% interest rate.

If your resolution involved raising your credit score, be patient.  It is easy for one to drop and usually a long time to build up the points.  The Consumer Federation of America and Vantage Score have a 12 point online quiz to help you understand the workings of calculations and actions you take that impact your score.  Be sure to read the answers provided when your selection is scored, you can learn valuable tips to change credit use.  The average score in the US is 695 for FICO and 673 for Vantage. A favorable score for the best credit offers is 700. 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Goals That Work

As we wrap up 2019, are you thinking of ways to try to “do better” or “be better” in the new year?  The idea of a fresh start is appealing, but if you’re like me, you may be hesitant to set goals, based on a track record of not following through in the past.

That leads me to one key to success: we should only set goals that are truly important to us. We have to really want the goal. To put it another way: there’s no point in setting a goal because you think you should. If you’re going to set a goal, only do it because the result matters to you.

Once you have a goal you can fully commit to, a next step is to plan how you will get the money – how much will you save each week or month? That will mean reducing some of your other expenses so that you can put money toward your goal. Think specifically about what changes you will make in order to save; deciding in advance that you will not go to the coffee shop, or not buy any clothing, or… (whatever) will make it easier to steer clear of tempting situations.

My final tip for now is to keep your goal on your radar. For example, if your goal is a new computer, then keep a picture of the type of computer you want in a location where you’ll see it regularly – on your refrigerator, at your computer desk, and/or in the section of your wallet where you keep your money and credit/debit cards. That will help you stay motivated; it’s easier to say no to extra purchases when you have a reminder in front of you of why you are making a sacrifice.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Giving

Today is #GivingTuesday, an annual event begun in 2012 to spark a “global generosity movement unleashing the power of people and organizations to transform their communities and the world on December 3, 2019 and every day.”

As it follows on the heels of “Black Friday” and “Cyber Monday” and even “Small Business Saturday,” I find “Giving Tuesday” a huge relief – a welcome change of pace, not focused on shopping.

There are three ways we can use our money: Spend, Save, or Share. I don’t think the “sharing” element always gets its due attention. Sharing happens in many ways, including charitable giving and also including gifts to people we care about. It’s true that for many people, Black Friday and Cyber Monday focus on shopping for gifts we want to give to others; that is sharing, after all. But I see the kind of gift-giving I do with family and friends to be a little different. It’s less of a pure kind of sharing, because it’s usually reciprocal: “I need to give them something nice, because I know they’ll be giving me something nice, too.”

What I really like about Giving Tuesday is that it seems to encourage a more selfless sharing, with a main focus is on promoting the good of others, on something bigger than ourselves. If I can buy gifts for people who already have plenty, then surely I can also GIVE selflessly to causes that will help make the world a better place, or to people who have real need.

As you consider your giving options, focus on why you want to give when deciding whether and where to make donations. Giving to organizations you know (often local organizations) can ensure that your gifts are used well; when considering larger national charities, check them out with organizations that evaluate charities, such as  www.give.orgwww.charitywatch.orgwww.charitynavigator.org, or www.givewell.org.  

Giving is part of my monthly budget every month all year round. So on Giving Tuesday I am reminded to consider where this month’s gifts will do the most good, and also to reexamine whether I can give a little more…

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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A Missing Link in Your Spending Plan?

checking a box

Making a spending plan is a key to being on top of your finances. When you look at the income you can realistically expect and then decide in advance how you want to spend it, that plan puts you in control; it helps you ensure your money is used where it matters most.

But is a spending plan all you need? The answer is a definite NO. Lots of people make spending plans but still don’t gain control. Why?  Because even the best spending plan is useless if you don’t FOLLOW it. And that doesn’t happen automatically. You need a strategy.

The good news is that for most people, part of their spending plan is easy to follow; fixed expenses like rent and other bills are predictable, and are usually paid just once a month. The tricky part for most people is staying within their planned limits for flexible expenses (groceries, fun, etc).

It comes down to questions like this:
If you plan to spend $320 on groceries for the month, how do you make sure you don’t spend more than that?

The answer? Keeping track. The only way to make sure you follow through with your plan is to have a strategy for checking up on your spending throughout the month. There are “old-fashioned” ways to do that, like writing down spending in each category, using either written ledger charts OR computerized spreadsheets. The “envelope method” also can help you follow your plan; it involves separate envelopes containing cash for each category of spending you wish to monitor (groceries, gas, fun, etc).

There are also “apps” that can help you track. These apps work in a variety of ways: with some, you enter your spending in your mobile device as you go along; with others, your debit card spending is linked to the app, so that, for example, all purchases at the grocery store are automatically added to your running total of food expenses.

The money management apps for mobile devices are generally provided by commercial organizations, and Extension does not recommend commercial products, but consumers have found many of these apps useful. One caution I suggest, however, relates to internet security when accessing your financial accounts. Choose settings within the app that will prevent the app from connecting to your bank account via open public wi-fi.

Tracking your spending, especially in the categories where you are most at-risk of exceeding your planned amounts, is the best step you can take to make your spending plan work. And that is the way to achieve your financial goals!

For more information, find our free 4-page publication “Tracking Your Spending.”

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Unretirement

Questions are part of our Writing Your Retirement Paycheck program. The more common questions are about finances, but every now and then, someone will ask, “How am I going to know when to retire and will I like it?” The question of when is sometimes tied to finances, which is fairly straightforward to discuss, but helping someone like retirement is a challenge.   

A number of individuals in the United States practice unretirement. A word being used to describe reentry into the workforce after a formal retirement. In an article published by the National Institute of Health, 80% of near-retirement individuals expect to return to the world of work in some capacity.  After 2 years, 25% are working full time.  Returning to work is less likely to occur if an individual experiences health issues. Interestingly, financial need does not appear to be a common reason for reentry into the workforce.

Retirement plans are highly individual; one size does not fit all. The successful transitions all have individual differences, but three elements are frequently mentioned.

  • A planned trip or activity to create a bridge between the everyday routine of going to work and the freedom of setting your own daily schedule. It creates a distraction and gives a chance for individuals to refocus on a new lifestyle.
  • Setting goals to complete in the early years of retirement. If chosen wisely, these goals help with time management, simulate thinking, and can result in enjoyment of new accomplishments.
  • Developing new relationships with individuals and groups outside of the workplace prior to retirement. New associations can help replace the psychological value individuals gained from their roles in the workplace. 

Planning for the transition to retirement is financial, but also includes mental preparation for a new lifestyle. Without that step, we might find ourselves part of the “unretirement” movement.  

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Who needs an emergency fund?

jar of coins

If you’ve gotten along for years without any money in the bank, you might scoff when people suggest that establishing an emergency fund should be a priority. Perhaps you respond with: “I always find a way to deal with emergencies, even without money in the bank!” You are not alone. A recent survey found that 4 in 10 Americans could not cover an unexpected expense of $400; that might be the cost of replacing an appliance that died or an unexpected car repair.

If you’re one of those 4 in 10 Americans, you’ve probably paid a price for your lack of savings. 

  • Perhaps your landlord or the utility company has lost patience with you, and will no longer give you any leeway; they may even threaten to evict you or disconnect your services. 
  • Perhaps family members avoid your calls because they’re tired of you asking for money. 
  • Perhaps you pay tens (or hundreds) of dollars a month in late fees and interest because of unexpected expenses have put you behind on bills.

Here’s the hard truth: living with no savings creates real problems for individuals and families. Savings is essential for financial stability. It can also reduce family arguments and help you sleep better at night.

So the question is this: HOW does a person build up savings? There are lots of “tricks” people use to save money. For example, they may save all their change, or every $5 bill they receive in change; or they may have a “frugal week” each month, in which they give up extras like coffee, soda or eating out, and then save the money they would’ve spent on those things. I love hearing about the variety of strategies people use!

When it comes right down to it, though, there are two core elements of any savings plan:

  1. You must treat your savings like a bill, and pay yourself FIRST. If you wait, planning to save “whatever is left,” the saving probably won’t happen. Make your spending plan for the month (or the week), figure out how much you can save, and do it first. That is the best way to succeed with saving.
  2. You MUST be saving because it is important to YOU. If you try to save just because I told you that you should, it won’t work. You have to want to save in order to be willing to make the changes required for saving. So think about WHY you want to have some savings built up. Maybe you’ll think back to the stress and drama you experienced the last time an unexpected expense occurred; avoiding that stress might be your reason. Setting an example for your children might be your reason. Keeping the utility company happy might be your reason. Note: It helps if your partner and family also agree that saving is important.

How much should you have in your emergency fund? That’s up to you, but I encourage you to set a realistic goal for the short term. If money is tight, it might take a couple of years to get to $1,000. You need some success sooner than that, so a goal of $100 might be a good place to start. When you reach that goal, you can celebrate! (And then start toward $200).

How have you succeeded with saving? We’d love to hear your stories!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Retirement: Longevity vs Life Expectancy

When planning for retirement, we often look up our life expectancy. One good source of life expectancy information is the Social Security Administration.   Among the many tools they offer is a life expectancy estimator. I looked up my own life expectancy.  Assuming I live to retirement age (67), the average life expectancy for a woman my age is 87. So that means I should plan for retirement to last till 87, right? Not so much. Remember: life expectancy information gives the average.  (I might not be average – what about you?)

I recently discovered a tool called the Longevity Illustrator, offered by the Society of Actuaries.  Why is this different than a life expectancy estimator? Because longevity is not the same as life expectancy! Longevity is broader — it addresses the likelihood that a person will live to various ages.

The Longevity Illustrator provides insight into possibilities — what are the “odds” that a person will live to extremely advanced age, for example? Again, I used myself as an example; remember that my life expectancy, assuming I live to age 67, is about 87. The longevity illustrator points out that there is nearly a 50-50 chance I’ll live to age 90, a 28% chance I’ll live to age 95, and a 10% chance I’ll live to age 100!!

What does that mean for our retirement planning? The longevity illustrator explains that each of us needs to decide what level of certainty is important to us. For me, they pointed out that:

  • If I am comfortable with a 25% chance that I might run out of money, then I might plan for a 28-year retirement.
  • If I want more security — perhaps only a 10% risk that I would outlive my funds, then I could plan for a 33-year retirement.

Anytime our decisions involve unknowns, like retirement does, we need to prepare for some complex thinking. We need to consider a variety of possibilities, and recognize that there will be no certainty; instead, we need to think in terms of probability. We also need to be prepared to be flexible. It’s a challenge, but having good tools can help.

Check out the Longevity Illustrator from the Society of Actuaries and see how it can inform your retirement planning decisions!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Goal Check-up

We’re two months past new years… how are you doing with your goals or resolutions?

No, I’m not here to nag you! It’s your life and your money, and you should use it as you see fit. But … if there is something you really wanted to accomplish, and you haven’t made progress yet, then now is a great time to revisit the goal and come up with a strategy that will help you move forward!

One great starting place is to break down your goal into small steps so that you have something concrete you can accomplish each day or each week. An example:

Suppose your goal is to pay off an $800 hospital bill. You don’t have $800 sitting around, so it seems impossible.

To break it into small steps, you might decide to pay $100/month.

  • You could break that down even further by saying that you will take $25 from each weekly paycheck.
  • Or you might decide to take $70 from your paycheck the third week of the month (because you don’t have many bills due that week), and $10 from all the other paychecks.
  • You might go a step further and say that the way your going to come up with $10/week is by staying away from the vending machines at work. Or perhaps you’re going to save $25/week by taking your lunch to work.

Another key to reaching a goal is to be convinced of its importance. Reaching any financial goal requires making some type of change. We humans are generally unwilling to change unless it is for a really good reason. So spend some time focusing on WHY you set that goal. Are you truly “sold” on the goal? If yes, that will make it much easier to accomplish; any time you’re inclined to stray from your plan, you can remind yourself of the “why” behind your goal.

If, on the other hand, you are not fully “sold” on the importance of the goal, you may have difficulty accomplishing it. Perhaps it is not the right goal for you. Or … if you know in your head that it’s a valuable goal, you may want to spend some time convincing your heart of its importance — outline all the reasons why your brain knows this is important, or make a list of all the good things that will result from it.

These are not the only ways to be successful in reaching a goal, but in my experience they help a lot. Set goals that are important to you, and identify small steps that will move you closer to the goal!

Best wishes with your new New Year’s resolutions!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Defining Unexpected Expenses

Life is full of surprises and events that sometimes shatter our daily routines and our finances. 

Conventional wisdom says that the money in an emergency fund would be earmarked for “unexpected expenses.”  That is true.  However, let’s think about what expenses actually are (and are not) unexpected.

Expenses that are not unexpected: monthly and annual bills

  • Regular annual or semi-annual expenses are not unexpected: these include property taxes, car insurance premiums,  annual life insurance premium, eye exams and other once-a year expenses.  You can plan and prepare for these expenses by setting aside a fixed amount each month.  Since you know these expenses are coming, they cannot truly be considered emergencies.
  • Occasional maintenance or repairs, such as a leaky roof or a dishwasher breakdown are not fully unexpected. either.  The same is true for other ordinary home repair, care repair, and moderate medical bills.  You may not know exactly what expenses will come up, but if you have a body, a car or a home, you need to expect to spend money on maintaining them. Setting aside money each month will build a fund for home repair and maintenance, car repairs, and  ordinary medical bills.

What expenses are truly unexpected?

An emergency fund is intended for expenses that fall outside the categories of “annual bills” or ordinary maintenance of home, car, and health.  Unexpected expenses are events like losing your job or being struck by a massive, out-of-the-norm health-related bill beyond what insurance will cover.  Emergency funds are designed for expenses that are highly unusual, not for common occurrences.

Bottom Line: It is possible that the savings account you were labeling as an “Emergency Fund” is actually your “Yearly Expense and Maintenance Fund.” That’s a good fund to have. But perhaps you also need an emergency fund.

 

 

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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