George Robertson, CFP, CRPS, AIF

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Navigating the Waters of Retirement

You have worked a lifetime to reach the point when you can retire. However, retirement planning does not end when retirement begins. What you do next, and how you navigate the array of tax issues and regulatory pitfalls, can make a big difference in the long-term success of your retirement plan. Here's a brief review of some of the more "taxing" issues you may encounter:

Early retirement and early withdrawals. For many, early retirement represents a lifelong dream. However, there is one issue you should keep in mind. If you take withdrawals from your qualified plan assets before age 59½, you may be subject to a 10% federal income tax penalty. To avoid this penalty, you can elect to take your annual withdrawals in a series of substantially equal periodic payments. The payments must continue for at least five years or until you reach age 59½, whichever comes later.

There are a few circumstances in which early withdrawals may be taken without penalty (e.g., death and disability). At 10% the penalty tax can be significant, and prevention should be planned whenever possible.

Waiting too long. You must begin taking mandatory minimum withdrawals from your traditional Individual Retirement Account (IRA) by April 1st of the year after you reach age 70½. (Distributions from an employer-sponsored qualified plan can be postponed until retirement if you continue working past age 70½, provided you are not an owner-employee.)

If you ignore the mandatory minimum withdrawal or do not take out enough from your IRA, you will be subject to a 50% penalty tax. The tax will be incurred on the difference between what you should have taken out of your IRA and the actual amount you withdrew from your IRA. Your minimum withdrawal amount will be based on the previous December 31st balance, divided by your life expectancy (or the joint expectancy of you and your spouse, if applicable). Working while receiving Social Security. If you receive Social Security and also continue to work, a portion of your benefits may be taxable. For more information, you can refer to Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits, or consult with your financial or tax professional.

You may also be subject to the so-called Social Security "give-back." Recent tax law changes eliminated the "give-back" for working Social Security income recipients who have attained full retirement age (age 65 to 67, depending on the year you were born).

Previously, the law required Social Security income recipients between the ages of 65 and 69 to return $1 for every $3 earned in excess of a pre-determined earnings limit. Now, the law requires a give-back of $1 for every $2 earned above $14,160 (in 2010) for individuals who are between the ages of 62 and 64 and receiving a reduced Social Security benefit. The year in which an individual attains full retirement age, the give-back is $1 for every $3 earned in excess of $37,680 (for 2010). The month in which the individual attains full retirement age, the give-back is eliminated. Therefore, it is important for anyone who is thinking about taking Social Security benefits while still working to understand the potential tax consequences and to plan accordingly.

Where you live can make a difference. Some important tax issues must be addressed when you select your retirement haven. Each state has its own rules on income, estate, sales, and property taxation. Your accountant can help you become familiar with the tax advantages and disadvantages of your retirement destination.

Planning Doesn't End When Retirement Begins

Your personal retirement plan most likely involved building a nest egg with regular savings over the years. However, once you reach retirement, your planning should not come to an end. You will always benefit from maintaining a savings plan consistent with your changing goals and objectives.

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