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Tax advantages for retiring at the end of the year versus beginning of next year

Forum|Forum|2 years ago
September 19, 2023
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This is a general tax related question. I live in Pennsylvania and would like to know if there are any tax advantages for retiring at the end of this year (Dec. 31) or waiting until January 2024? My TIAA financial advisors and retirement planners say it is a tax question and will not give me any guidance. I would appreciate any advise you can offer from this community.

Thanks in advance!

Not A Product Question

Best answer by dmertz

With respect to your federal income taxes, there is no status of being "retired," only the status of having separated from service with a particular employer. The things I can think of that could potentially be affected:

It might affect your required beginning date for RMDs from a qualified retirement plan provided by this employer. If you separate from service on December 31, 2023, the still-working exception with respect to a 2023 RMD would no longer apply (if that's relevant to your circumstances).
For the purpose of making a deductible traditional IRA contribution for 2024, the separation date might affect whether or not you are covered by a workplace retirement plan for 2024 (assuming that the employer provides such a plan). This will also depend on whether the plan uses a calendar year or a fiscal year.
For the purpose of making any IRA contribution for 2024, it could affect whether or not you have supporting compensation in 2024.
Working in 2024 will increase your 2024 income, even if only slightly.

There might be other considerations with respect to your state income taxes.

D

dmertzAnswer

Employee

With respect to your federal income taxes, there is no status of being "retired," only the status of having separated from service with a particular employer. The things I can think of that could potentially be affected:

It might affect your required beginning date for RMDs from a qualified retirement plan provided by this employer. If you separate from service on December 31, 2023, the still-working exception with respect to a 2023 RMD would no longer apply (if that's relevant to your circumstances).
For the purpose of making a deductible traditional IRA contribution for 2024, the separation date might affect whether or not you are covered by a workplace retirement plan for 2024 (assuming that the employer provides such a plan). This will also depend on whether the plan uses a calendar year or a fiscal year.
For the purpose of making any IRA contribution for 2024, it could affect whether or not you have supporting compensation in 2024.
Working in 2024 will increase your 2024 income, even if only slightly.

There might be other considerations with respect to your state income taxes.

H

Hunts_a_lot1Author

Thank you very much for responding, dmertz!

O

Opus 17

Employee

With regards to social security, if you are under your full retirement age and begin taking your benefit, and you worked in the same year, there is a calculation that needs to be done to prevent your social security benefit from being reduced in the next year. In some cases, it may be simpler to work up to 12/31 and then take your social security benefit in January of the following year. Whether this will affect you is complicated, and there should be financial planners who can advise you on this. And that's not really an income tax question but a benefits question. The taxability of social security benefits are calculated the same no matter when you retire; the amount of benefits can sometimes be affected by when you retire.