We're nearing the end of the year and now's the time to think about taxes while you can still do something about your tax situation. Factoring taxes into your retirement planning can make a big difference.
Rick Rodgers, a financial planner and author of a new book on retirement, "The New Three-Legged Stool," points out that once a couple earns $50,000 per year of retirement income from a combination of Social Security and other taxable sources, 85 percent of their Social Security will be subject to tax. If they can figure out a way to make $20,000 of that $50,000 nontaxable income, they'll drop their total tax liability to practically nothing.
Rodgers characterizes this challenge as a game retirees should play with the IRS. You win when you keep the IRS out of your pockets. While you're still drawing a paycheck and have the financial flexibility it provides, now is the time to think about your post-retirement tax-game strategy.
One thing Rodgers thinks is worth consideration this year is moving your retirement savings into a Roth IRA or a Roth 401(k). The conversion isn't for everyone, but he thinks many people would be in better shape. My colleague Kay Bell wrote recently about new rules that affect some of these rollovers. Any conversion that is done in 2010 doesn't have to be reported on your 2010 return. You can report that income on your 2011 and 2012 returns. For example, if you converted $100,000 in 2010, you would report $50,000 in income in 2011 and $50,000 in 2012. But if you wait to do the conversion after 2010, you have to declare the income in the year you convert and pay it all at once.
You have until the end of the year to make one of these rollovers, so if you're going to do it, better get moving. In the long run, it can save you a bundle.