If you’re retired or near retirement, you’ve probably already done the homework to ensure you’re ready financially. But hopefully your research has not left out the tax ramifications that the transition to retirement usually brings. Every retiree needs an awareness of the possible tax traps they may encounter as their income shifts from reliance on wages or self-employment income to retirement-based pensions, investment income, etc. Lifestyle changes can also pose tax questions – e.g., a home sale and move to a new location. This brochure highlights tax pitfalls retirees should be on the lookout for and offers a few pointers for overcoming them. Social Security BenefitsPre-retirement: If you haven’t yet retired but are trying to predict your retirement cash flow, be sure to request an Earnings and Benefit Statement from the Social Security Administration (SSA). It’s simple to do – just call the SSA at the number listed in your local telephone directory; ask for Form SSA-7004. Fill out the form, return it to the SSA, and they will send you a projection of the benefits you can expect to receive when you retire. You can also obtain this information online at www.ssa.gov. Post-retirement: If you’re already receiving social security, try to avoid traps like these that could cause you to pay some of it back: The SSA limits earnings (i.e., wages, commissions, etc.) of retirees who are under full retirement age (which depends on the year you were born, but is now generally ages 66 to 67). If you think you would like to continue working, it’s wise to make a comparison of how loss of benefits in the short-run may affect possible increases in benefits in the future (i.e., because work continuation allows extra contributions to the social security system). The amount of income tax you pay on your social security will depend on your filing status (married, single, etc.) and the level of your income. Be sure to take advantage of tax planning, particularly if you expect fluctuations in your income from year-toyear – planning ahead may help level the ups and downs and cut the amount of your social security that becomes taxable. Watch your investment choices. Tax-free interest from investments like municipal bonds, for example, can increase the amount of your social security income that is taxable. Here again, tax planning is a key factor that can help keep a larger portion of the benefits in your pocket instead of Uncle Sam’s. IRA AccountsPremature Distributions: If you are under age 59 1/2, be extremely careful about drawing money from your IRA. A federal penalty of 10% applies to certain premature distributions; some states also assess a penalty. However, there are safe methods of withdrawing IRA funds before age 59 1/2. For example, withdrawals of substantially equal periodic payments based on your life expectancy (or the lives of you and a beneficiary) may prevent the IRS from assessing the penalty. Minimum Distributions: You will only be able to contribute to an IRA as long as you receive compensation and you are under age 701/2 (no contribution is allowed for the year you turn 701/2). At age 701/2, you must begin taking at least minimum distributions from your account; otherwise the IRS can assess a penalty. Your required minimum distribution (RMD) is determined by using a factor based on your age from an IRS table called the “Uniform Lifetime Table.” If your spouse is your beneficiary and is more than 10 years younger, you may use the Joint Life & Last Survivor Table instead. To determine the minimum distribution amount, divide the balance of your IRA account on Dec. 31 of the prior year by the factor from the appropriate annuity table. If you have multiple IRA accounts, the total required distribution may be taken from one account or partly from each account or any combination. Choosing A Beneficiary: A beneficiary is someone you choose to receive your IRA in the event of your death. You may choose your spouse, your child(ren), a friend, etc. Choosing a beneficiary also plays a big part in how the IRA is distributed at your death. Be sure to consider the choice carefully before making a final decision. You need to notify the trustee of your IRA of the name of the beneficiary and to update the beneficiary information if circumstances change. For example, if you name your spouse as primary beneficiary and later divorce, your ex-spouse will receive the IRA upon your death if you don’t change the beneficiary designation, even if your will indicates all of your estate is to go to your children. Pension Plan DistributionsAt retirement, you may be faced with many decisions about your pension plan (either employer-provided or your own self-employed plan). Any number of options are usually available for these payouts, among them: An Annuity: An annuity provides a regular income over a period of time; it is generally paid in monthly installments. However, the term over which an annuity is paid varies, depending on how you choose to have payments made. For example, your employer will probably ask if you want your pension paid over a 10-year period, over your lifetime, over the combined lives of you and your beneficiary, etc. When you receive an annuity from a plan to which you made contributions that have already been taxed, a part of each annuity payment you receive is nontaxable. This is called your “investment in the contract.” When you have an investment in the contract, special calculations are necessary to determine how much of your annuity will be taxable.