Once retired, don't get caught off guard by taxes

Your Money

September 05, 2004|By Lorene Yue

You can't stop thinking about taxes when you stop working.

"Definitely look at where all of your income is coming from and the taxation on all of that," said Paula Dorion-Gray, president of Dorion-Gray Retirement Planning Inc. in suburban Chicago. "Find out what your tax implications are going to be. A lot of people are surprised at how much in taxes they end up owing."

There are other things to keep in mind when you retire, such as how too much income can reduce your Social Security benefit and increase your tax burden and the best way to move your 401(k) plan if you choose to.

FOR THE RECORD - An article Sunday in the Your Money section about the tax consequences of receiving Social Security benefits incorrectly stated that earning additional income will reduce the Social Security benefits of recipients who have passed full retirement age.
In fact, it is early retirees whose payments are reduced. For those under full retirement age when payments begin, $1 in benefits will be deducted for each $2 earned above the annual limit, which for 2004 is $11,640 and for 2003, $11,520.
In the calendar year an early retiree reaches full retirement age, $1 in benefits is deducted for each $3 earned above a higher annual limit up to the month of reaching full retirement age. For 2004, that limit is $31,080; for 2003, $30,720. Full retirement age was 65 through 2002, and began gradually increasing in 2003.
To clarify another part of the article about income taxes on Social Security, it is not the case that benefits may be taxed as much as 85 percent, but that as much as 85 percent of your benefits may be considered taxable.
The Sun regrets the errors.

If you decide to roll over your 401(k) or 403(b) into another investment vehicle, do it through a direct transfer. Have your plan administrator make the check out to the administrators of your new investment.

"Don't take possession of the check because it could trigger taxes if done incorrectly," said Sharon Burns, executive director for the Association for Financial Counseling and Planning Education in Upper Arlington, Ohio.

If you deposit the check yourself, the Internal Revenue Service may count it as income and take a big chunk out of it.

If you plan to work while you are collecting Social Security, be aware that making too much money can reduce your benefit, said Sonya Ross, public affairs specialist for the Social Security Administration.

If you are at or over full retirement age, which in 2004 is 65 years and four months, for every $3 you earn over $31,080 you will lose $1 worth of Social Security. If you are collecting Social Security and you are younger than 65 years and four months, you'll lose $1 worth of benefits for every $2 you earn over $11,640.

To determine if your Social Security benefits get taxed, the IRS adds half of your Social Security benefits to all your other income and tax-exempt interest. Your benefits will be taxed as much as 85 percent if that total is greater than the IRS base amount. For the 2003 tax year, the base amounts were $25,000 for a single filer and $32,000 for married couples filing a joint return.

Knowing this can help you make better investment choices. For example, if at age 66 your total income from a part-time job, a pension and Social Security put you at $30,000, you'll want to ensure that money from other investments doesn't put you over the $32,000 mark without being aware of the tax implications, said Dorion-Gray.

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