Tax and Legal Checklist For Those Nearing Retirement

Tax and Legal Checklist For Those Nearing Retirement You have worked hard all of your life and can now think about retiring and taking it easy. Congratulations. Now comes the task of preparing for your retirement. There are many details to cover, both financial and non-financial, including income, taxes, maintenance of current lifestyle, health care, asset transfer, home ownership, travel and extra expenses. Listed below are some important points to consider when planning for your retirement:

  • Income Needs It is important to first determine how much income will be needed to pay your monthly household expenses, including your mortgage, utilities, health insurance and so forth.
  • Income From Social Security Most everyone may have received a social security statement within the last few years, detailing how much of your lifetime income has been recorded and contributed to your social security benefits at retirement age. If not, go to your social security office and make an appointment with them. Social security is certainly not enough income to pay for most retirees pre-retirement lifestyles. In fact, the average monthly benefit in 2001 is only $845, and the highest possible benefit payable to a 65-year old retiree is $1,536 per month.
  • Income From Pension Plans, 401(k), IRA There are many types of retirement and pension programs, which many companies participate with their employees. Others may have established their own IRAs, Keogh plans, SEPs and SIMPLE IRAs. Withdrawals from these plans prior to age 59-1/2 are usually penalized, and certain minimum distributions must be taken once age 70-1/2 is reached. Knowing how much is available for withdrawal, presuming that you are older than 59-1/2, is important in budgeting your monthly living costs.
  • Personal Savings Decide how much, if any, personal savings will be converted into retirement income. To turn equity investments into retirement income, retirees may decide to sell off part of their holdings and put the lump sum after taxes into income-producing bonds, CDs or annuities. Or, they may work out a plan to tap a percentage of those holdings each year. Unfortunately, it is difficult to predict what the rate of return, or earnings will be from year to year. Therefore, it is difficult to predict the income to be received.
Some retirees may have trouble determining which investments to sell and which to keep. There is somewhat of a tax break, however, when profitable investments are sold. Capital gains are taxed at a lower rate than ordinary income. To qualify for this rate, investments must have been owned for at least one year. There are bigger tax savings for investments purchased in 2001 or later if they are held for at least five years before selling. In those cases, the tax on capital gains will be lowered to 18% for those in the 27.5% tax bracket, and 8% for those in the 15% tax bracket.
  • Home Equity Consider the sale of the residence or a home-equity conversion. Equity in a residence can be a significant source of funds for the client who has more than one residence or who wants to downsize to a smaller home. Taxpayers who sell or exchange a principal residence can exclude up to $500,000 (married filing jointly) of realized gain from such a sale.
  • Part Time Work Consider whether part-time work will be an additional source of retirement income. Although most retirees never completely retire, there may be social security consequences with regard to the amount of income one may earn. If you are between the ages of 62 and 64, you will be penalized $1 in social security benefits for every $2 earned in excess of $10,680 of earnings in 2001. There are no earnings limits after attaining age 65 or older.
  • Life insurance Some retirees have dependents and need to keep up an adequate amount of life insurance. Life insurance proceeds may be needed to supplement lost pension income to a widow or widower upon losing their spouse's retirement income. However, others may be over-insured, due to having a mortgage-free home and other income resources that may make having so much life insurance not necessary. For those people, tapping into their life insurance cash values to pay other expenses may make sense.
  • Estate Plan Estate planning is the preparation of an individual's instructions about the disposition of assets upon death. It could be as simple as the preparation of a will, or as difficult as establishing a family limited partnership. For 2002, if your estate is valued in excess of $1,000,000, your heirs may owe estate taxes of 55% of the excess amount. Depending on the circumstances and the value of your estate, the best advice one can give to someone who is contemplating retirement is to talk to an estate tax attorney or financial advisor who is qualified in financial estate planning. They can guide you in developing an estate plan to ease the burden to your loved ones after you are gone.

Disclaimer: All materials presented on this web site are for informational purposes only and should not be considered as a substitute for any tax, accounting or legal advice. Some of the material may have changed due to new legislation. Please contact us for specific information.