Retirement should be a time to enjoy your hobbies and the freedom that comes with it. However, if you don’t prepare for taxes, your fixed income might shrink faster than you expect. Thankfully, there are several tax breaks designed to help retirees keep more of their money. Here are eight tax breaks you should be aware of during retirement.
Deduction
One of the top perks for retirees is the higher standard deduction available to those aged 65 and over. While everyone can take a standard deduction, it increases significantly once you hit 65. For instance, in 2024, the standard deduction is $14,600 for single filers and $29,200 for joint filers. However, once you reach 65, an additional $1,950 is added, which means more money stays in your pocket.
This higher deduction is a straightforward way to reduce your taxable income, ensuring that you can stretch your retirement savings further.
Withdrawal
Another advantage for retirees is the elimination of early withdrawal penalties from retirement accounts like 401(k)s or IRAs once you turn 59½. Before this age, withdrawals usually incur a 10% penalty, but after this point, the penalty disappears. This provides greater financial flexibility, allowing you to access your funds without worrying about hefty penalties.
For instance, if you withdraw $20,000 from your retirement account after turning 59½, you avoid the $2,000 penalty you would have faced before reaching that age.
Savings
Health Savings Accounts (HSAs) offer another benefit for retirees, especially those 55 and older. The contribution limit increases by $1,000 for older individuals, allowing you to set aside more for medical expenses. Given that healthcare costs often rise during retirement, this higher limit is a valuable opportunity to save more.
For example, if you’re in the 24% tax bracket, the increased HSA contribution could save you an additional $240 in taxes. This makes it easier to manage future healthcare expenses without dipping into other retirement funds.
Threshold
Retirees also benefit from a higher income threshold for filing tax returns. In other words, you can earn more before being required to file a return. In 2023, the threshold was $14,700 for single filers and $28,700 for joint filers if both are 65 or older. This higher threshold means you might avoid the hassle and cost of filing a tax return altogether.
This break is particularly helpful for retirees living on a fixed income, as it reduces the likelihood of owing additional taxes at the end of the year.
Contributions
Retirees aged 50 and over can take advantage of catch-up contributions, which allow you to contribute more to your retirement accounts beyond the standard limit. For 401(k) plans, the catch-up contribution limit in 2024 is an extra $7,500. This can significantly boost your retirement savings, helping to grow your nest egg even further.
Maximizing these contributions, especially with professional advice, can make a substantial difference in your retirement portfolio’s value over time.
Credit
If you’re 65 or older, you might qualify for the credit for the elderly or disabled, which can reduce your tax bill by up to $7,500. To qualify, single filers must have a gross income below $17,500, while joint filers must have a combined income below $25,000. This credit directly reduces the amount of taxes you owe, providing significant relief for those on a tight budget.
Deduction
Contributing to an IRA also offers tax benefits for retirees. Depending on your filing status and adjusted gross income, you may be able to take a full deduction up to your contribution limit. For those aged 50 and over, the catch-up contribution increases this deduction by an additional $1,000. For a retiree in the 22% tax bracket, this could mean an extra $220 in tax savings.
Distributions
Qualified Charitable Distributions (QCDs) allow retirees to donate to charities directly from their IRAs, which can be done tax-free. This not only supports your favorite causes but also reduces your taxable income. For instance, a $5,000 QCD can save you up to $1,200 in taxes if you’re in the 24% tax bracket.
Planning
To maximize these tax breaks, personalized tax planning is crucial. Working with a financial advisor can help you identify the best strategies to minimize your tax burden during retirement. Everyone’s situation is unique, and a tailored plan ensures you’re making the most of the opportunities available to you.
With the right tax strategy, you can enjoy a more comfortable and financially secure retirement. Taking advantage of these tax breaks could make all the difference in preserving your hard-earned savings.
FAQs
How does the higher standard deduction benefit retirees?
It reduces taxable income, leaving more money for retirees.
At what age can retirees avoid early withdrawal penalties?
After age 59½, the 10% early withdrawal penalty is eliminated.
What’s the benefit of higher HSA contribution limits?
It allows retirees to save more for future medical expenses.
Who qualifies for the credit for the elderly or disabled?
Taxpayers 65+ with a gross income below specific thresholds.
What are Qualified Charitable Distributions (QCDs)?
Tax-free donations from an IRA directly to a charity.