Tax Planning for Seniors: Minimizing Liabilities and Maximizing Returns

Retirement brings on a lot of things, like the freedom to pursue your passions, a chance to start traveling, and the ability to strengthen and deepen relationships with family and friends. You’ve spent decades working and creating a support system to ensure a financially healthy and socially enjoyable retirement. But now that it’s here, you want to figure out how to maximize what you’ve created.

Tax planning might not be the most exciting element of financial planning, but it is necessary for maximizing your financial security. Whether you’re nearing retirement age or are happily retired, there are things you can do to minimize your liabilities and maximize your returns. Read on to learn more about where and how to begin.

Understand Your Income Sources

As you move into retirement, you understand your income sources. You have cash flow from things like Social Security, pension funds, or dividends on investments. But it can only take a year or so of turbulent economic activity to necessitate changes to your strategy.

What happens when income or expenses fluctuate? It can be time to reconsider your plans. Unexpected events take place even in the best of times. That’s why it’s a good idea to review your financial plan annually or more frequently if a major life event occurs to ensure you’re staying on track with your goals.

Build an Emergency Fund

It can be advantageous to keep your money in a retirement account for tax benefits, but what happens if you need to make a large withdrawal? Not only can this potentially drain some of your retirement savings, but it also can make your investment returns more vulnerable.

Think back to the advice you received as you were building your wealth. Creating an emergency account was a savvy financial strategy to protect yourself against unexpected expenses. That hasn’t changed — it might be even more critical in retirement.

Imagine a plumbing issue damaging your kitchen, leading to an unexpected remodel in your future. Or, say your furnace grinds to a halt, and it’s time for a new HVAC system. Without an emergency savings account, you might have to pull from assets that are creating income. An emergency fund provides protection to ensure your assets continue financing your retirement.

Rethink Housing

The new year could see a rush of people over the age of 50 downsizing to smaller homes, says well-known financial advisor Meredith Whitney. Considering they own more than 70% of all homes, that could impact retirement accounts on many levels.

Retirees have an unprecedented amount of wealth tied up in equity. It provides the freedom to live the way you choose where you choose. Why not live in a tax-friendly state?

It’s an effective strategy for saving on taxes. Eight states have no income taxes, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Some states don’t tax retirement benefits earned in another state, which gives retirees a very good reason to move — perhaps somewhere a little warmer, or a place closer to the grandkids. It might make financial sense to move.

Create a Long-Term Care Plan

One of the costs that retirees primarily focus on is healthcare. Studies suggest that 60% of people over age 65 will eventually need long-term care, and the median cost for assisted living sits at around $4,500 per month.

If you haven’t considered long-term care before retirement, it’s time to start planning. Most long-term care isn’t covered by Medicare or basic health insurance policies. It might impact future earnings if you’ll be paying for caregiving services or assisted living facilities out of traditional retirement accounts. Don’t wait until you need services; work with a financial expert with caregiving experience early to maximize your strategy.

Stay Informed

The IRS implements substantial changes to tax laws every year. You can stay updated on these tax changes by reading IRS information guides that apply to your unique needs.

Congress also periodically makes changes that can significantly impact your tax bill, such as the Tax Cuts and Jobs Act. This reduces the amount of local property, state, and local income or sales taxes deductible for federal income tax purposes.

Because rules and regulations can change significantly, working with professionals you trust can help you navigate shifting financial waters. Lawyers, accountants, and financial planners can point you to wise investment strategies to help you with each annual tax bill. There isn’t always one strategy that works. Knowing early can help you make decisions that may positively impact the rest of your life.

Do It Again

While you may have planned on pursuing your passions or traveling the world during retirement, these activities may be more likely when you have a steady hand on your financial vehicle. Revisions may be necessary, and you may need to adjust your expectations along the way. But with an eye on your retirement plan and a pulse on your tax planning, you’ll be able to keep your budget in line to enjoy retirement on your terms.