Retirement isn’t just a life change, it’s one of the biggest life changes. Navigating the financial side of retirement can be complicated and intimidating. Unfortunately, many retirees are missing out because they’re focused on the old April 1 tax deadline. It’s important to keep in mind that smart tax planning doesn’t stop here. OverTraders.com gives retirees the confidence and control to manage their own retirement accounts. Through our training programs, we prepare them to sidestep expensive tax penalties.

Understanding the April 1 Deadline for Retirees

The April 1 deadline is most often connected with Required Minimum Distributions (RMDs) from retirement accounts. An RMD is the minimum amount you need to withdraw from certain retirement accounts each year. You have to begin mandatory withdrawals by age 73.

Importance of the Deadline

The April 1 deadline is important for a couple of reasons. First, that’s the last day you can take your first required minimum distribution (RMD). Psst—for the record, this rule only applies to the one year that you turn 73. Generally, you need to begin receiving your first Required Minimum Distribution (RMD) in the calendar year you turn 73. You have the option to push it back until the next year’s April 1 date. This added flexibility might be particularly useful if you’re looking to defer paying tax on the distribution for a brief time period.

Consequences of Missing the Deadline

If you don’t take your RMD by the deadline, you’ll owe a stiff penalty for failing to withdraw the funds. Compounding the problem, if you miss a required withdrawal, the IRS can impose a punitive tax equal to 25% of what should have been withdrawn. In order to prevent incurring a penalty, it is important to be mindful of the date. Don’t forget … you’ll need to withdraw the necessary amount each year! If you choose to wait until April 1 of the following year to take your first RMD, pay attention to this key point. You’ll have to take two RMDs that year—one by April 1 and one by December 31. This might even thrust you into a new tax bracket, making advanced planning important.

Tax Penalties for Retirement Withdrawals

Being aware of the tax consequences of withdrawals taken during retirement is an important component of ensuring financial security in retirement. Making early withdrawals from retirement accounts can result in steep penalties, leaving less money for the retirement years you’ve planned for.

Overview of the 25% Tax Penalty

Among the most severe punishments you can incur is a 25% tax. This penalty taxes any amount that should have been taken as Required Minimum Distributions (RMDs), but were missed. This severe penalty highlights the necessity of following the RMD rules. Believe it or not, that’s not the only penalty retirees should be concerned about. If you take money out of tax-advantaged retirement accounts—such as Traditional IRAs and 401(k)s—before you’re 59 1/2, you’ll incur a 10% early withdrawal penalty. In addition to the penalty, you’ll pay ordinary income tax on whatever you withdraw.

Strategies to Avoid Penalties

Luckily, there are quite a few exceptions to the 10% early withdrawal penalty. Here are some scenarios where you won't be penalized:

You can withdraw up to $10,000 from a Traditional IRA without penalty to buy, build, or rebuild a first home.

  • Disability: If you become totally and permanently disabled, you can withdraw funds without penalty.

  • Beneficiary Status: If you inherit a retirement account, you, as the beneficiary, won't pay the 10% penalty.

Age 59 1/2 or Older: Once you reach age 59 1/2, withdrawals are penalty-free.

Substantially Equal Periodic Payments: Receiving distributions as a series of substantially equal periodic payments,

  • Qualified Disaster Distribution: the distribution is a qualified disaster distribution or qualified disaster recovery distribution, or

  • IRS Levy: the distribution is due to an IRS levy of the IRA or other qualified plan.

Taxation of Retirement Income

There’s more than one type of retirement income, and they’re all taxed differently. Knowing how various types of income are taxed will allow retirees to develop better financial strategies.

How Different Types of Income are Taxed

Retirement income has traditionally consisted of Social Security benefits, pension payments, and retirement account distributions. Your Social Security benefits might be taxable—it all depends on what your combined income looks like. Pension payments and withdrawals from Traditional IRAs and 401(k)s are taxed as ordinary income. As a reminder, Roth IRA distributions will be tax-free once the participant reaches retirement, provided the account is at least five years old. In order to qualify, you need to be 59 1/2 years old and have had the account for five years.

Common Deductions and Exemptions

Retirees are in a unique position to benefit from multiple deductions and exemptions which can significantly lower their taxable income. The standard deduction is often greater for people 65 and older. Some medical costs are tax-deductible when they exceed a specific share of your AGI. Itemizing deductions, such as medical expenses, state and local taxes, and charitable contributions, can lower your tax liability if the total exceeds the standard deduction.

State Tax Implications for Retirees

State tax laws can make a huge difference for retirees and for those thinking about retiring in a different state. America’s Tax Town Even before the pandemic, some states provided a much more welcoming tax climate for retirees.

States That Do Not Tax Retirement Income

Several of these states—Florida, Texas and Wyoming—don’t tax any retirement income at all, making them magnet states for retirees eager to escape their home state’s tax drawer. These states typically include:

  • Alaska

  • Florida

  • Nevada

  • New Hampshire

  • South Dakota

  • Tennessee

  • Texas

  • Washington

  • Wyoming

Retirees who choose to live in these states can save their pockets quite a pile in taxes throughout retirement.

Factors to Consider When Moving States

Here are a few things retirees should weigh before packing their bags—aside from state income taxes, of course. Estimates fluctuating with property taxes, sales taxes, and overall cost of living by state. Access to specific healthcare needs, proximity to family/friends/support networks, and climate preference would all be factors to consider as well. It’s important to consider the fiscal savings along with what you value most personally to determine what represents the best value for your dollar.

Stay Informed with OverTraders.com Resources

Whether it’s new tax laws or retirement planning strategies, knowledge is the key to a secure financial future. OverTraders.com offers detailed articles, guides and tutorials to equip retirees with the tools they need to make informed decisions about their financial future.

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By understanding the April 1 deadline, tax penalties, and state tax implications, retirees can effectively manage their finances and enjoy a financially secure retirement. At OverTraders.com we’re dedicated to giving you the tips and information necessary to help you make sense of the confusing world of retirement planning.