Tax Issues for Retirement

Whether you’re still building your business or you’re firmly established and looking ahead to the next phase, it’s a good idea to be informed about retirement so you can best prepare.

Social Security benefits

Social Security benefits can begin between the ages of 62 and 67, depending on several factors. Benefits may be available to spouses, divorced spouses, and widow(er)s at an earlier age. No matter what age, the same tax rules apply. In terms of federal income tax, these benefits may be tax free, or includible in gross income at 50% or 85%. Nearly 30 states have fully exempt Social Security benefits from their income taxes.


It’s estimated that a healthy couple retiring at 65 can expect to pay $400,000 for the rest of their lives. This includes Medicare Parts B and D, a supplemental policy, dental and vision care, and any out-of-pocket expenses. Those with Health Savings Accounts are free to access their funds at any time, however, they cannot contribute to HSAs after age 65. Unfortunately, the cost of long-term care for chronic illness is not covered by Medicare.

For federal income taxes, the amount of premiums for long-term care insurance that can be treated as a deductible medical expense is capped by age. In 2016, those who are more than 60 years old but not more than 70, the dollar limit is $3,900; for those 70 and older the limit is $4,870 Fortunately, Medicare premiums and other unreimbursed medical expenses are deductible.

Retirement plans and IRAs

Hopefully you’ve got the resources you need to sustain you comfortably in retirement. For many, this is in the form of 401(k)s, 403(b)s, and IRAs. Pension plans usually begin to pay benefits at age 65. Funds from qualified plans may be able to be withdrawn penalty-free at age 55 under certain circumstances. Keep in mind, withdrawals before a specified age can cost you a penalty of 10%.

Usually, you must start to draw on these funds when you reach age 70. Those over age 70 can transfer tax free up to $100,000 annually from an IRA directly to a public charity; these are called qualified charitable distributions. There are some exclusions, such as SEPIRAs, SIMPLE-IRA, or certain other plans.

Selling a residence

Whether you’re relocating or just downsizing, it’s likely you may be selling your primary residence at some point. Gain on the sale of this residence up to $250,000 ($500,000 on a joint return) is tax free. Any additional gain is subject to capital gains tax, which is 15% to 20%, depending on your tax bracket. You may also incur a net investment income tax. This is all very complicated, so your CPA is the right one to walk you through it.


If you plan to move across state lines, you’ll need to consider that state’s income tax, sales tax, death tax, and property tax (if you will be owning a home). Fortunately, federal law prohibits states from taxing pensions, including IRAs and 401(k)s, payable to former residents.

This is a lot to take in, and fortunately we deal regularly with accounting matters related to retirement. Call our office and let us sit down with you to answer any questions you have. To read more, see the full article.