“Hope I die before I get old.”
Remember when that lyric from The Who’s “My Generation,” was a Baby Boomer mantra? Sigh… Ah, to be young, idealistic, and poor.
In my experience, those same Boomers, now age between 52 and 70, have more than adjusted to maturity and hope to live to be very old. And while they may no longer pour into the streets to protest the government’s policies, they are still looking to stick it to The Man by paying the lowest possible taxes.
Here are some tips for Boomers looking to fight the (tax) power:
Use the Catch-Up Clause. If you are 50-plus you are allowed to sock away more money in your tax-deferred retirements than younger folk. You can contribute $6,500 annually to your IRA, as opposed to $5,500 for those under 50. You can put $24,000 in your 401(K), $6,000 more than younger employees. Think about that for a minute. If you’re 50, participate in a 401(k) and plan to retire at 65, that’s $90,000 in additional tax-deferred savings you could amass before you get that gold watch.
Take Advantage of Tax Breaks. Did you know older Americans are entitled to a larger standard deduction on their federal taxes? If you are 65-plus, you can take $7,850 while the whippersnappers get only a $6,300 break. If you itemize, you also get a bigger medical deduction. Filers who are 65-plus can deduct expenses in excess of 7.5% of their adjusted gross income while younger taxpayers must meet a 10% threshold.
Avoid Premature Withdrawals. If you take money from your IRA or 401(k) before age 59 ½, the taxman will hammer you. The money you take out will be taxed as income and you’ll pay a 10% penalty.
Know When to Cash In. You MUST start pulling money out of your 401(k) or IRA on a regular basis when you turn 70 ½. Why? Because you haven’t paid any taxes on the money in that account and Uncle Sam wants to wet his beak. The amount you must withdrawal, a.k.a. your “required minimum distribution” is determined by an IRS formula that is based largely on life expectancy.
Factor the Tax on Your Social Security. Many retirees are caught off guard when they discover that Social Security benefits are taxed. Couples with less than $32,000 in combined income (adjusted gross income, tax-exempt interest and one-half of your Social Security benefit) won’t pay tax on their Social Security income. Couples with combined incomes between $32,000 and $44,000 may be taxed on up to 50% of their Social Security. Those bringing in more than $44,000 may get taxed on 85% of their Social Security.
Growing older may bring its share of problems, but as the above demonstrates, age also has its privileges. So embrace it! After all, as another Boomer balladeer, Tom Petty, once observed, “If you’re not getting older, you’re dead.”