Plan strategically for retirement accounts

Longer working lives and the specter of higher rates next year are creating tax headaches for seniors.
Gone are the days when retirees simply had to remember to file their quarterly estimated tax payments.With more seniors working, even as they begin collecting Social Security and taking distributions from retirement accounts, a tax strategy has never been more important, said Robert Keebler, a partner with Keebler & Associates, a tax-planning firm in Green Bay, Wis.
“I am actually not seeing people retire,” he said.Instead, older clients are hanging on to their careers or cobbling together part-time work as they blend in Social Security and pension benefits, he said. That can mean taxes on Social Security income or a jump in your income-tax bracket or both.With the highest capital gains rate increasing in 2013 to 20 percent from 15 percent, many seniors, retired or not, are considering selling investments this year to avoid the hike, Keebler said.

And with marginal rates also scheduled to rise next year, managing retirement income with an eye toward staying within your lowest possible tax bracket is crucial. “It’s all about bracket management,” Keebler said.

In other words, he said, think about taking just enough in retirement account distributions that you can stay within your top marginal bracket without spilling into the next higher one. Then convert those funds to a Roth IRA, which generally grows and is withdrawn tax-free, for when you need them later in retirement.

Here are some other issues to keep in mind this year:

Roth conversions. If you converted traditional IRA money to a Roth IRA in 2010, the first year the strategy was allowed for higher-income taxpayers, it may be time to pay up. The income tax owed on those first-year conversions can be spread across 2011 and 2012, so half of the tax owed will need to be included on 2011 returns, said Mark Luscombe, principal federal tax analyst with CCH, a tax information provider. Taxes on conversions done in 2011 will also be due.

Working. If you haven’t reached full retirement age, the maximum you can earn in 2012 and still receive full Social Security benefits is $14,640, up from $14,160 in 2011. Maximum earnings subject to Social Security tax increase to $110,100, up from $106,800 in 2011.

Moving. If you’re planning a move to new retirement digs in another state, consider the tax implications on retirement income.

According to CCH, Michigan, Wisconsin, the District of Columbia and Georgia made changes to retirement-plan taxation last year.

Notably, Georgia begins to phase out income taxes on retirement income.

AMT. People who pay quarterly estimated taxes, including many retirees, need to watch for news on exemption amounts under the alternative minimum tax, a parallel tax system that disallows certain deductions.

Millions more taxpayers will owe higher taxes under the AMT system in 2012 because a “patch” that had granted a temporary increase in the income levels subject to it expired.

According to the IRS website, the exemption drops to $33,750 for singles and $45,000 for couples filing jointly.

Medicare. A 3.8 percent surtax kicks in on certain types of nonwage income next year for higher-income taxpayers, so some experts recommend that this year those who could be affected convert more traditional IRA dollars to Roth IRA accounts, which aren’t factored into income thresholds.

Social Security. For a worker retiring at full retirement age, the maximum Social Security benefit this year will be $2,513 per month, according to CCH. For 2011 returns, taxpayers with modified adjusted gross income of between $25,000 and $34,000 (single filers) and between $32,000 and $44,000 (joint filers) could have up to 50 percent of benefits taxed, while up to 85 percent of benefits could be taxable above those levels, CCH says.

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