Most retirees have Social Security income and many others have additional income sources, including investments and required minimum distributions from tax-sheltered accounts. Some people may also have pensions or continue to work part-time in retirement.
With multiple lines of income, retirees may need to work closely with both their financial advisors and their accountants to navigate tax payments, especially if they receive income from alternative investments, like hedge funds or partnerships, which may not issue tax forms until well past the traditional April 15 tax deadline.
For people about to retire or the newly retired, Craig Bolanos, CEO of Wealth Management Group LLC, urges his clients to meet with tax specialists to deal with the nuances of transitioning into retirement.
“I tell everybody, your action item going into retirement: you’re going to find a CPA strategist,” he says. “This is non-negotiable.”
A CPA strategist will review all of the new retiree’s income sources to maximize income while minimizing tax bite. “This person is going to strategize for you your withholding game plan to ensure that you don’t run into the buzz saw of excess taxation on your social security, Medicare means-testing and other issues,” Bolanos says.
Sources interviewed agree that the easiest way to avoid underpaying taxes is to have income withheld. However, some retirees would rather estimate quarterly payments to avoid both underpaying and overpaying taxes.
Refunds aren’t common for retirees, but it happens. Bolanos gives a few reasons why. Employment income may have changed because someone worked only part of the year. A retiree might have taken big investment losses on 2018’s return filed in 2019. Or the retiree may have had too much money withheld on the 1099 distribution from their IRA, 401(k) or annuity.
He prefers that retirees don’t receive refunds, since it can affect some means-testing benefits for social security and Medicare that kick in at certain thresholds. Retirees should consider applying refunds to next year’s taxes, especially if they’re expecting a larger tax bill.
“If we’re going to owe more money, it’s going to force us again to take more money out and put more taxable income on return,” he says.
If retirees get a refund, it isn’t considered income and won’t affect future taxes, says Dean Borland, senior vice president at FineMark National Bank & Trust.
Tax underpayment is a bigger worry for retirees, since underpayment can result in penalties and interest charges which can pinch cash flow. The amount of penalties varies by the size of the underpayment, but Naomi Ganoe, CPA, managing director and private client service practice leader at CBIZ MHM says penalties don’t kick in until the underpayment is more than $1,000.