May 16, 2022


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Tax breaks that every retirement investor should know

Rutgers School of Business Professor Jay Soled speaks with Yahoo Finance Live about how to contribute to retirement savings accounts and how taxes impact retirement planning

Video Transcript

EMILY MCCORMICK: Tax season is upon us, and the IRS has started accepting and processing 2021 tax returns. If you’re a retiree, there are some tax breaks you should be keeping in mind. And for those, we have Jay Soled, Rutgers School of Business professor and master of accountancy and taxation director, joining us for more as part of our Retirement Series brought to you by Fidelity Investments. Jay, it’s easy to overlook tax-saving opportunities. What are some of the big tax breaks that retirees should be keeping in mind this year?

JAY SOLED: Well, even before they retire, what they can do is they can make larger contributions. If you’re 50 and over, you can make an additional $1,000 contribution to an IRA. And with respect to any 401(k), there’s a catch-up where, again, if you’re 50 and over, you can contribute an additional $6,500. And what this translates into is significant dollar savings because if you are at a marginal rate of, say, 30%, this can result in thousands and thousands of dollars of tax savings. So every pre-retiree should consider this. And when you’re retired, this should be a financial bonanza if you can make these additional contributions.

BRAD SMITH: Certainly, and in the form of charitable donations that taxpayers may have made over the course of this year, is there anything new that they should be knowledgeable of when they go to file their taxes this year?

JAY SOLED: Well, this year, not only are they allowed a $300 deduction above the line, but they can also take part of their IRA money and contribute the first $100,000 of their IRA to a charity. And they don’t have to report that under 1040. And it avoids– and it also counts towards their so-called minimum distribution rules. So any retiree who wants to make a robust contribution to charity can give up to this $100,000 threshold and leave their worries behind. It’s a great, great tax break.

EMILY MCCORMICK: We’ve been talking a lot about the Great Resignation and this idea of workers wanting to leave their jobs, maybe go into retirement early. So if you’re someone who’s below the age of 65, maybe even below the age of 50, are there still tax breaks that you can take advantage of?

JAY SOLED: Well, what I would say is people should be careful. Early retirees have to be very circumspect because if they retire too early, and they try to make withdrawals prior to the age of 59 and 1/2, they face a whopping 10% penalty on any early withdrawal. So they should not look at their– any sort of retirement funds as a cash reservoir that they should tap into too early.

So I would say, caution is in the air. That’s what I would recommend, that they have to make sure they have plenty of assets aside from retirement funds to tap into because, again, they risk– they have this tremendous risk if they tap too early into their IRAs or 401(k)s.

BRAD SMITH: Jay, what’s the new real figure that you should have saved up for retirement?

JAY SOLED: Well, that’s going to really depend on your style of living. I mean, there’s no magic number, all right? So I don’t want to– it really depends on how you plan to spend your retirement. Do you plan to retire in Costa Rica and live on $1,000 a month? Or do you plan to go to Southern California, where it’s going to cost you $100,000 during the course of a year? So I don’t know if I can say, Brad, if there’s one magic number I would say if you reach or cross that threshold, you’re at heaven’s gate.

EMILY MCCORMICK: What do you think that those in or nearing retirement should be considering when deciding whether they want to itemize or take the standard deduction when they’re doing their taxes?

JAY SOLED: You know, when it comes to the standard deduction now is so robust that, right now, statistically, I believe it’s about 80% of people in the country do not itemize. So they take the standard deduction. And the good news is that if you look, that if you’re 65 and older, you get even a larger standard deduction. So if you’re single, you get an extra $1,750, and if you’re married, you get an extra $2,800 towards your standard deduction.

So truth be told, in many, many instances, the vast, vast majority of retirees are going to use the standard deduction in lieu of itemized deduction, keeping in mind that right now, there’s a state and local tax cap that they can– most people– everyone is capped at $10,000 under state and local. So for many, many people, it makes no sense to itemize, unless– and this is a big caveat– unless you’re making significant charitable contributions. If they’re making significant charitable contributions, probably north of $30,000 plus, then it would make sense for them to consider itemizing. Otherwise, the standard deduction for most retirees is the way to go.

BRAD SMITH: Jay, some of the common thinking as well is even, and as Emily had referenced earlier, with the quits rate and perhaps those who are choosing to retire early, they might be choosing to retire early with the thought process of what they have invested and where they could tap into some of the investments that they’ve made, even prior to the point where they decide to retire. And so even on a go forward basis, how do they need to still know how to adequately file for their taxes, given some of the capital gains that they may see and tap into along the way?

JAY SOLED: Well, what I would recommend, keep in mind that right now, most people, to the extent they have liquidity, they 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. So for example, if they bought Facebook, let’s say, for $100, and now it’s trading at– not after yesterday, but let’s just say that it’s trading at $1,000.

Upon their demise, the tax basis in those shares goes from $100 to $1,000, so their beneficiaries have no taxable gain. So to the extent they can, they should avoid cashing in their highly appreciated securities and really just tap into their bonds, cash, and other investments that are not appreciated, so that ultimately, their heirs have less in the way of tax– a much lower tax burden. So if that’s one recommendation that I can make that would be universal, is that stay away from cashing in on their highly appreciated assets.

EMILY MCCORMICK: All right, we’ll leave it there. Jay Soled is Rutgers School of Business professor and master of accountancy and taxation director. Thank you so much again, and have a great weekend.