Many people look forward to retirement and the change of pace that comes with it. But retirement is a big step financially, so it's important to go into it prepared. If you're planning to retire in 2017, here are a few tax moves to make before 2016 comes to a close.
1. Maximize your retirement plan contributions
Many workers reach their peak earning years right before retirement. If you're one of them, it means you're probably paying more taxes now than you did earlier on in your career. It also means there's a good chance you'll pay more taxes this year than you will next year once you retire. But you can ease the burden for the current tax year by maxing out your 401(k) or IRA. Anyone 50 or older can currently contribute up to $6,500 to an IRA and $24,000 to a 401(k), and that's money that will go in tax-free. Not only will you get an up-front tax break, but you'll have more savings to work with once you're retired.
2. Claim your medical expenses
Most of us spend a fair amount of money each year on medical expenses. The good news is that if you itemize your tax return, you can deduct not just your actual expenses but peripheral costs like traveling to appointments and parking fees. Now there is a catch: To claim medical expenses on your taxes, your total out-of-pocket costs must exceed 10% of your adjusted gross income (AGI). But if you're currently 65 or older, you get a bit of a break for 2016, as your expenses only need to exceed 7.5% of your AGI to take a medical deduction. Come 2017, even those 65 and older will be subject to that 10% threshold, so now's a good opportunity to take advantage.
3. Cash out your losses
Owing a huge amount on your 2016 tax return isn't a great way to kick off retirement, so if you have investments that are currently down, selling them can reduce your taxable income for the year. Any investments you sell at a loss this year can automatically be used to offset gains. So if you made $5,000 earlier this year from a great buy but can sell another investment at a $5,000 loss, you'll cancel out that gain and avoid paying taxes on it. Better yet, if your losses for the year surpass your gains, you can use up to $3,000 of the remainder to reduce your ordinary income. And, if you're left with more than a $3,000 loss, you can carry the rest to the following tax year.
4. Be charitable
Once you're retired and living on a fixed income, you may not have the wiggle room to be as charitable as you'd like. That's why now's the time to donate to your favorite organizations. Not only will you be doing a good thing, but you'll get to deduct your donations and lower your tax burden as a result. All you need to do is retain a record of your donations and make sure to contribute to a registered charity.
5. Prepare for required minimum distributions
If you're retiring at an older age, you may be required to take minimum distributions from your IRA as early as next year. Traditional IRAs mandate that you start taking withdrawals by April 1 the year after you turn 70 1/2. So if you turned 70 earlier this year and will be 70 1/2 before the end of the year, you'll need to take your first required minimum distribution by April 1, 2017. And you'll want to put that deadline on your calendar now, because failing to do so could result in a 50% penalty on whatever amount you don't withdraw. Furthermore, because traditional IRA distributions are subject to taxes, now's the time to figure out how much you'll need to withdraw and what your tax liability might look like next year. The sooner you do this research, the better prepared you'll be in 2017.
Retirement is a major milestone that can impact your finances in more ways than one. A few smart tax moves this year could make the transition a whole lot smoother in 2017.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.