Retirement can come with a lot of tax questions and concerns. From understanding the tax implications of withdrawing from your retirement accounts to minimizing taxes on investment income, it can be overwhelming.
In today’s episode, we’ll break down the top ten tax questions retirees are asking in 2023. Before you file your 2022 taxes and plan ahead for the rest of the year, make sure to listen to this episode as we’ll discuss some important tax questions that retirees should ask themselves to ensure they're making the most of their retirement savings and minimizing their tax burden.
Here are some of the tax topics we’ll discuss in this show:
- What are the tax implications of withdrawing money from your retirement accounts? (1:30)
- How will the SECURE Act 2.0 impact your retirement income and taxes? (4:04)
- How will your taxes change if you decide to move to another state in retirement? (8:15)
- If you want to give money to your children or grandchildren, what are the tax considerations? Can you still contribute to an IRA in retirement and still get a tax deduction? (12:41)
Ryan: It does vary a little bit from state-to-state on these different things such as pension, Social Security. So you do need to be mindful from state-to-state how it works.
Announcer: When it comes to financial planning. You need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial and Insurance Solutions.
Ben: Well, hello and welcome in to Candid Conversations Retirement Talk with Ryan Cravitz. I am Ben George, and we're talking today about the top tax questions you should be asking if you are a retiree or nearing that here in 2023. Obviously, not going to cover everything today, but this is a lot of great questions that'll get you thinking. Make sure you are planning ahead for taxes when it comes to retirement because, Ryan, as we all know, I know people are thinking about tax filing right now because we are beginning of the year, but tax planning is so crucial for your long-term success, right?
Ryan: Oh, absolutely.
Ben: So it's going to be a good topic today. Let me point you to the website for any questions or if you want to get in touch with Ryan, you can just log on to cravitzfinancial.com or call 714-462-9155. So again, we got 10 questions we want to run through today, and we know taxes can be overwhelming, things are constantly changing, there's a lot of questions, concerns. So if you are getting close to retirement, just be thinking about this to make sure you're asking yourself these questions, to make sure you have answers, to make sure you are minimizing your tax burden in retirement. So let's start in the income planning realm here a little bit to begin with, Ryan, and I'll start off with, what are the tax implications of withdrawing money from your retirement account?
Ryan: Well, it depends on what type of account it is, but most often, it's going to be a pre-tax account. So if it's like a pre-tax IRA or pre-tax 401(k) or something like that, money that's never been taxed, when you take that money out, it's going to be taxed at ordinary income. Now, if you happen to have a Roth IRA or Roth 401(k) or something like that that was funded after tax, then as long as it's qualified distribution, you pull that money out, it's going to be tax-free.
Ben: So yeah, some things we'll be thinking about with that there. It can be kind of complicated trying to do on your own so you want to work with someone to help you navigate what to expect there. And when you're talking about income planning, Social Security always comes up as well, and I'm sure the question is that you want to think through is, are my Social Security benefits going to be taxed?
Ryan: Yeah. This is a common question, and it's interesting with Social Security because it's one of those things that you may have to pay taxes on 85% of your Social Security benefits or you may have to pay taxes on none of it. And it all depends on what your other income is. And so, one of the things that you want to make sure that you're doing in retirement is managing which accounts you're withdrawing from and when, based upon how they're taxed, because all of that can have an impact on your Social Security benefits and how much of that is going to be subject to taxation.
Ben: All right, so as you think about claiming that or start putting your plan in place to claim your Social Security benefits, be thinking about that and see how all that fits into your overall plan. All right. Pension, I don't know how many people still receive a pension, Ryan. I think there's probably still a decent amount of retirees that are heading into retirement now that have a pension. But for those that do, how is the taxation on that income different from other forms of income?
Ryan: It's taxed ordinary income, so it's going to be like withdrawing from a pre-tax, 401(k) or a traditional IRA account that was all funded with pre-taxed dollars. When you take the income, it's ordinary income. Now, one thing I should say, as we're talking about this today, we're talking about on the federal level, it does vary a little bit from state-to-state on these different things such as pension, Social Security. So you do need to be mindful from state-to-state how it works.
Ben: Yeah, always so important to be aware of that, but hopefully you are lucky enough to get a pension, but something to think about as you're planning there. Well, SECURE ACT 2.0 was recently brought in, signed at the end of 2022, adding on to the original SECURE Act from a couple of years ago. So if you are in line for retirement this year or near to it, this is a great time to be thinking about and figuring out exactly where the SECURE Act will make some changes or how it will affect your retirement income and taxes.
Ryan: Yeah. This SECURE Act 2.0 is it's called that was passed at the end of 2022. There was so much to it. I mean, there's just so much to unpack with it and some of the changes already are going into place this year, 2023, but some of them are going to go into place over the course of the next several years here to come. But some of the things to just be mindful of, to be thinking about when it comes to your retirement income and your taxes is one of the big ones is they changed the RMD age. So when you have to start taking out, you required minimum distributions. So it used to be 70.5, that's when you had to start taking out, you required minimum distributions. And then the original SECURE Act passed about three years ago, and that got pushed back to age 72, and now it's pushed back again.
So it's either age 73 or it's age 75, and that just depends upon the year you were born. So you do want to be aware of what that age is. But the other thing to consider here is even though they keep pushing back the age that you have to start taking out your RMDs, it doesn't necessarily mean that you should. There's a very good likelihood that you should start withdrawing at least some of that money sooner. It's important to manage those tax brackets so that maybe if today you're able to withdraw that money and pay tax on it at a lower tax rate instead of keep deferring the growth on the IRA or the 401(k). And then sometime in the future, having to pay the tax, you may be boosted into a higher tax rate. So you definitely got to be aware of that when it comes to managing those distributions and IRAs in general.
But they made, like I said, a lot of changes. One of the other changes that they made, it's certainly a nice change, is that they reduce the penalty. If you don't take your RMDs in time, it used to be 50% or not in time, but if you didn't take out the required amount of your RMD, they penalize you at 50%. That's now been reduced to 25%. And if you do it in a timely manner, they say, although I don't think that they've said exactly what a timely manner is yet, but then it's only 10%. But in the real world, you just need to be careful, make sure that you are withdrawing what you need to withdraw and when. There's other things, QCDs and other things too, we could talk about probably later on. But there's a lot that's changed here with the SECURE Act.
Ben: Yeah, it's probably worth devoting entire conversation to the SECURE Act 2.0 because there are a lot of changes, but the RMDs is a big part of that. So if you have questions or want to kind of see, "Hey, maybe what else in that SECURE Act 2.0 effect me," you can always get in touch with ryancravitzfinancial.com or over the phone 714-462-9155. Here's another tax question as we go through maybe 10 top questions for retirees here in 2023. Number five, are there any special tax deductions or credits available for retirees?
Ryan: Well, one thing that sticks out is if you're over 65 and you're taking a standard deduction, which most people are taking the standard deduction nowadays, now that the standard deduction has been raised so significantly over the last several years here is that you do get an additional amount above that. So for instance, if you're married and you're filing jointly, each of you get an extra $1,500 on top. So this year, 2023, I believe you're getting $30,700 is a standard deduction amount. So that's been raised quite a bit for people over 65.
Ben: All right, number six here. For people that are thinking about moving, I don't know how many people are leaving California necessarily, Ryan, but I know Florida is always a popular destination, Arizona, wherever it is. If you are thinking about, "Hey, maybe I want to move to another state, maybe get closer to family," whatever the reason, how will your taxes change if you decide to move to another state and retirement?
Ryan: Key thing to look at is the state tax rates in the state that you're thinking about moving. Certainly California has some of the higher state tax rates in the country, and some states, like you mentioned, Florida is one does not have state income tax. So it's definitely something to consider, but it shouldn't be the only reason to move.
Ben: And everybody looks at that income tax-free, that's a big draw. But I'm sure this is never a great decision, probably or rarely a great decision just to base move entirely on that tax cut, right?
Ryan: You're right. And the other thing to consider too is that a state may have no taxes or might have significantly less taxes, but maybe they have other gotchas or other ways that they're able to get money from you. For instance, maybe their property taxes are higher. So that's just kind of one example. So you have to consider the whole picture, especially when you're considering making such a big move.
Ben: They're always going to find a way to get their money, They're not letting you off the hook, that's for sure.
Ryan: That is true. Now, I will say there's been a decent amount of people that have moved from California in recent years, but primarily that's the cost of living in other things.
Ben: Yeah, absolutely. All right. A few more questions here as we're going through the top tax questions for retirees. Charitable contributions, are there any tax benefits there if you're making these in retirement?
Ryan: Well, one of the ways that I like to do this is with a QCD, which is a qualified charitable distribution. And so, the way that that works is that if you're charitably inclined and you are 70.5 or older, you can withdraw money out of your traditional IRA that you'd have to pay taxes on when you take that money out, and instead of taking that money and paying the tax, you could instead have some money, whatever you want to take, I'll call it $5,000 or whatever the amount is, go directly to the qualifying charity. It's got to be a credible 501(c) organization, all that, you got to make sure of that. But as long as that's the case, charity is happy they get the $5,000, let's say in that case. You're happy, you wanted to give to charity and you were able to save income taxes because that $5,000 just goes directly over, so you don't even have to pay taxes on that withdrawal at all.
Ben: Okay, good to know if you are thinking about QCDs and retirement. All right, so the other gifting side of things, and maybe you want to give money to your family, whether it be children, grandchildren, you'd like to give them. So what are the tax considerations if you want to gift that money during your retirement?
Ryan: So this year in 2023, you could give $17,000 per individual. So for instance, what that means is let's say you have two kids and you want to give money to your kids, you could give $17,000 a piece for a total of $34,000. And also if you're married, your spouse could do the same thing. And so, you can give up to these limits here this year, 2023, and it won't affect your gift tax exclusion. So that's pretty nice if you want to take advantage of that.
Ben: It's a good option to have if you have the money, but you probably don't run into too many situations where somebody is really bumping up against it every year, right?
Ryan: The other thing to consider here is although you're limited to $17,000 per individual per year, most people aren't giving that amount in a single year. And if you are somebody that has quite a bit of money, the gift tax exclusion is a lot higher than it used to be, so most people don't even have to worry about it.
Ben: Yeah. Okay. All right. Number nine, talking about real estate here, if I take out a reverse mortgage, are there any tax concerns there?
Ryan: Fortunately not. No, there's no taxes to be worried about with the reverse mortgage. It is considered a loan, so you don't have to worry about paying the taxes there.
Ben: All right. Final question on our 10 tax questions for retirees here in 2023, if you are retired, can you still contribute to an IRA and get a tax deduction?
Ryan: Yes, you can. Even if you are retired, you can contribute to an IRA. Now, remember, you have to have earned income in order to make that contribution, but maybe you're working part-time or something like that, I mean, you can go ahead and contribute to an IRA. I mean, that's not a problem. It was changed back about three years ago with the passage of the original SECURE Act that now no matter how old you are, you can still make that contribution to an IRA, again as long as you have the earned income.
Ben: Awesome. So 10 questions here to think through. If you aren't sure how to answer these or hopefully you got a little more clarity now after the conversation, but if you really want to dive in and apply them to your own retirement plan, please contact ryancravitzfinancial.com. You can also call 714-462-9155 to get in touch with his office there in Irvine, California. But it is important tax planning, it's a key piece of the retirement plan, so make sure you are on top of it before you get to retirement and hopefully this episode will help through that. Ryan, thanks for the time as always. We'll talk again soon.
Ryan: Sounds good.