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Four tax tips everybody should know when investing for retirement


Taxes and retirement. The two can go hand in hand to help assure your financial security, according to one expert.

Here are four tools to help you capitalize on tax savings as you approach or enjoy retirement, according to Rutgers School of Business Professor Jay Soled, who spoke with Yahoo Finance Live.

Catch-up contributions

Both pre-retirees and those who just retired can make bigger contributions to their retirement accounts. Those 50 and over can contribute an extra $1,000 to their IRAs and an extra $6,500 to their 401(k)s if they’re still working.

This results in “significant dollar savings,” Soled said, because if you’re taxed at a marginal rate of 30%, this means thousands of dollars in tax savings.

“So every pre-retiree should consider this,” Soled said. “And when you’re retired, this should be a financial bonanza if you can make these additional contributions.”

Standard deduction or itemize?

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Itemizing deductions used to be a way to optimize tax savings. However, “the standard deduction now is so robust that about 80% of people in the country do not itemize, but take the standard deduction,” Soled said.

Taxpayers 65 and older get an even larger standard deduction. Single filers get an extra $1,750, and married filers get an extra $2,800 towards their standard deduction. Because there’s a $10,000 cap on writing off state and local taxes, unless retirees are “making significant charitable contributions of $30,000 plus, then the standard deduction for most retirees is the way to go,” Soled said.

Charitable contributions

This year, if you gave cash to a charity, you can take the standard deduction and still deduct up to $300 for single filers and up to $600 for joint filers.

Additionally, “any retiree who wants to make a robust contribution to charity can give up to $100,000 from part of their IRA…and they don’t have to report that under 1040,” Soled said, noting this contribution can also double as your required minimum distribution that you must take from your retirement accounts when you turn 72.

Think about your heirs

The pandemic meant some people tapped into their assets to manage financially — especially if they ended up retiring early. However, tapping into certain assets might trigger tax burdens for heirs.

“Most people, to the extent they have liquidity, should not tap into their highly appreciated assets because under current law, there is a rule that upon their demise, the tax basis is equal to fair market value,” Soled said. “Just tap into bonds, cash, and other investments that are not appreciated, so that heirs have a much lower tax burden.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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