Retirement planning is a complex process with unique tax implications. A failure to complete certain tasks within a given timeline can lead to the loss of potential benefits, like tax deductions, while a misstep could result in an audit.
Two specific considerations to keep in mind before the end of the calendar year include contributions and distributions.
Review contributions to retirement accounts
Income tax is generally not due on contributions to 401(k) retirement accounts. In order to reap this benefit the contribution must be made during the applicable calendar year. The contribution remains unchanged from 2016. The Internal Revenue Service (IRS) has set this limit at $18,000.
An additional benefit is present for those who contribute to IRA retirement accounts. These generally have a longer period, with deductions allowed on contributions made through April of 2018 for the 2017 tax year. The limit for these contributions is set at $6,000 — also unchanged from 2016.
Take out required minimum distributions
Those who are already enjoying retirement can have a different issue with taxes. One specific area of concern: required minimum distributions. If over the age of 70 and ½, distributions from 401(k)s and IRAs are generally required. These distributions are subject to income tax. A failure to take a required distribution can come with a steep tax penalty. The recipient could forfeit a 50 percent tax on the required minimum distribution amount.
A publication in U.S News delves into the problems that can arise with these distributions. One key takeaway to remember: a failure to take the distribution one year can result in double the distribution amount the second year. This could lead to an unusually high tax bill since it could push the recipient into a higher tax bracket.
Take heed and make sure your retirement planning is line with tax obligations to avoid unnecessary penalties.