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Financial Resource Center

Tools for financial success.

Deductions and Accelerated or Deferred Retirement Plan Distributions

Lots of things change when you retire, including how you approach your taxes. You’ll still need to decide if you want to take the standard or itemized deductions, but you’ll also need to tackle retirement plan distributions and how they affect your tax liability. Read on to learn more.

Standard or itemized deductions

A first step in limiting your tax liability is deciding whether you will file for the standard deduction or itemized deductions—remember that you can’t do both, it’s an either/or decision. This will determine how much of your income won’t be taxed. Your taxable income is what’s left after you subtract your deduction(s), and your taxable income determines your tax bracket and tax rate.

Available itemized deductions include mortgage interest (on loans up to $750,000), real estate taxes (up to $10,000 in most cases), and medical expenses over 10% of your adjusted gross income (AGI). However, the standard deduction increases for taxpayers 65 or older as of the last day of the current tax year, so that might be a better option for you.

The best way to decide which deduction strategy is right for you is to run the numbers both ways: learn what the current year’s standard deduction is, then add up your qualified itemized deductions and compare the two numbers. Whichever amount is greater is the one that will reduce your taxable income the most and is therefore likely the decision you should make.

Accelerate retirement plan distributions

If you have a lot of itemized deductions to take, consider accelerating your retirement plan distributions for the year. You don’t have to spend that extra money (in fact, you should save it to spend in later years), but taking those distributions now, when you have a zero or low tax rate, would help you avoid paying more taxes in a future year if you took the distribution later.

Or defer retirement plan distributions

Another strategy is to defer your retirement plan distributions until you really need them, until they become required by tax law, or until you’re in a lower tax bracket. Keeping your taxable distributions to a minimum pushes more of your income to future tax years, which can be helpful if you expect you'll fall into a lower tax bracket in the future.

So how do all of these tax details fit into financial planning? Well, in retirement, just like during working life, you will need to monitor your income, stick to a budget, and pay taxes—especially if you want your retirement savings to stretch and last as long as you need it! Deciding how to minimize your tax liability in retirement is an important part of that. For more ways to make your money stretch in retirement, speak to a certified financial advisor.

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