If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications. Here’s a brief rundown of four tax and financial issues you may deal with when you retire:
Taking required minimum distributions.
This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).Selling your principal residence.
Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000. To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years. If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis , which can save you tax.Engaging in new work activities.
After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask:- Should the business be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
- Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
- What expenses can you deduct and can you claim home office deductions?
- How should you finance the business?