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Retiring in 2018? Here Are 5 Tax Moves to Make Now

By Maurie Backman - Dec 10, 2017 at 7:18AM

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Congratulations, you're set to retire. But before you do, you may want to put some thought into your tax situation.

If you're gearing up for retirement, you probably have a number of questions on your mind. Where will you live? How will you spend your days? And how bad will your taxes be once you're no longer collecting a steady paycheck? If you want to set yourself up for a secure retirement and maximize your tax savings during your final year in the workforce, here are a few moves to get on -- immediately.

1. Ramp up your retirement plan contributions

If you're retiring next year, now's the time to pump as much money as you can into your IRA or 401(k). The current limits for workers 50 and over are $6,500 and $24,000, respectively, but come 2018, you'll get to put another $500 into your 401(k) for a total of $24,500. This means that if you aren't planning to retire until June 2018, you have another six months to fund your retirement and lower your taxes in the process. If you're retiring at the start of 2018, contribute as much as possible in December.

Senior couple embracing and smiling outdoors


Since traditional IRA and 401(k) contributions are tax-deductible, the more you put into your account at present, the less you'll pay the IRS on your 2017 return. And if you end up snagging a refund by virtue of sneaking more money into a tax-advantaged retirement plan this year, you can reinvest that cash and use it during your golden years.

2. Consider a Roth IRA conversion

Perhaps you earned too much money during your career to contribute directly to a Roth IRA. Or maybe you were eligible to contribute, but wanted the immediate tax break that came with funding a traditional account instead. No matter your circumstances, if you're about to retire, consider converting some of your current IRA funds into a Roth-style account. Though doing so won't help your taxes for the current year, it'll help you avoid taxes on some of your income in retirement.

Remember, whereas traditional IRA withdrawals are subject to taxes in retirement, Roth withdrawals are always taken tax-free. If you do a conversion now, you'll have to pay the associated taxes -- but you may be in a decent position to do so if you're still working and earning a salary. And this way, you'll buy yourself more flexibility down the line.

3. Pay off your mortgage

If you're nearing retirement and still have mortgage debt, you should aim to pay it off before you bring your career to a close. Not only is it good to enter retirement mortgage-free, but if you accelerate your payments to knock out your home loan balance by the end of the year, you'll have more mortgage interest to write off on your 2017 taxes. And you might as well take that deduction now, when you're still working and conceivably have a higher income and associated tax burden, than next year, when you're retired and your tax bill will likely be lower to begin with.

4. Take advantage of loser investments

If you're holding poorly performing investments in a traditional brokerage account, it pays to unload them before the year is up and lower your 2017 taxes in the process. Any time you sell investments at a loss, you can use that loss to offset capital gains, thus reducing your IRS bill. Furthermore, if you don't have any taxable gains to show for, you can instead use your investment loss to offset your regular income.

Why rush to sell off underperforming investments now? It's the same logic as above -- your 2017 tax bill will likely be higher than your 2018 bill if you're working this year but retiring next. It therefore pays to reap those added tax savings when you need them the most.

5. Get your facts straight on required minimum distributions

If you're retiring next year and you're nowhere close to 70, you won't have to worry about required minimum distributions (RMDs) for quite some time. But if you'll be turning 70 1/2 shortly after retirement, you'll need to understand how RMDs work.

In a nutshell, once you turn 70 1/2, you're required to withdraw a specific amount from your traditional IRA or 401(k) each year. That amount will be based on your savings balance and life expectancy at the time. (Roth accounts don't impose RMDs, which is another reason to consider a conversion, like we talked about above.) If you don't end up taking your RMD in full, you'll be penalized to the tune of 50% of whatever amount you fail to withdraw. That's why it's crucial to read up on RMDs and understand what's expected of you.

Retirement is an exciting milestone to look forward to, and the right tax moves this year could set the stage for a successful start. Follow these tips, and with any luck, you'll enter retirement from an even stronger place financially.

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