It's a big myth that taxes are something retirees don't have to worry about. Quite the contrary -- taxes can be a huge burden for seniors, especially since retirees are often limited to a fixed income that forces them to spend very mindfully.
If you're retiring in 2024, it's important to be strategic about taxes and know what the latest rules look like. Here are some key points to consider as your career comes to an end.
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1. You can contribute earned income to a traditional IRA for the tax break
Just because you're planning to retire in 2024 doesn't mean you won't be working at all. Many retirees opt to work in some capacity to stay busy and generate extra income.
If you go this route, you'll have an opportunity to contribute money to a traditional IRA. Doing so could help you avoid paying taxes on those earnings.
There's no age limit for funding an IRA. The only requirement is that you have to contribute earned income.
If you collect benefits from Social Security, those can't be put into an IRA. Social Security is considered income for tax purposes, but not earned income. But if you work any sort of job, including a freelance gig, that income is eligible to go into an IRA.
2. A Roth conversion ahead of retirement could be beneficial
If you have all of your savings in a traditional IRA, you should be aware that once you start taking withdrawals, you'll face taxes on the money you remove from your account. Not only that, but eventually, you'll be forced to take required minimum distributions.
Before you retire, it could pay to convert a portion of your traditional IRA to a Roth IRA. Roth IRA withdrawals are tax free, and Roth IRAs also don't force you to withdraw from your balance every year.
You'll need to be careful when doing a conversion, since it could result in a sizable tax bill for you. If you have an accountant or financial advisor you work with, you may want to talk to them about the ideal sum to move over.
3. Two states will no longer tax Social Security
Social Security has the potential to be taxed at the federal level, and whether you'll pay those taxes on your benefits will depend on your income. But a number of states tax Social Security as well. And if you're looking to relocate in retirement, you may be inclined to steer clear of states that could take a bite out of your benefits.
That said, beginning in 2024, two states will no longer tax Social Security -- Nebraska and Missouri. So it could pay to add them to your list of potential states to call home in retirement if you do your research and determine that they're a good fit for you.
Taxes have the potential to upend your retirement, or at least impact it. So it's important to go into that stage of life with the right strategy. Keep reading up on tax changes and rules as your official retirement date gets closer, so you can aim to lower your IRS burden and stretch your senior income as much as possible.
