Many retirees struggle to make ends meet after they stop working, and the rising cost of healthcare can make it even harder for them to stay afloat. The last thing they want to do is make mistakes that will cost them dearly come tax time. Retirees can keep more of their money out of Uncle Sam's hands by avoiding the following pitfalls.
Not taking required minimum distributions
Traditional IRA and qualified plan owners are required to begin taking minimum withdrawals from these accounts on April 1 of the year after the year in which they turn 70 1/2. Failure to do this will result in a whopping 50% penalty on the amount that should have been distributed, so make sure you take these distributions in a timely fashion, and report them as income on your tax return.
Timing a Roth conversion poorly
If you own a traditional IRA or qualified plan and would like to convert it to a Roth IRA, then you will pay income tax on the amount you convert. If you convert too much of your Roth IRA balance at once, you may end up knocking yourself into a higher tax bracket and incurring a bigger income-tax bill than you're ready to pay. You can avoid this by spreading the conversion out over the course of two or more tax years. Don't hesitate to consult a tax or financial advisor if you need help determining whether your conversion income will put you into a higher tax bracket.