5 Ways to Get Your Retirement Back on Track

A lot of Americans have seen their retirement plans interrupted in the bad economy. According to CNN, nearly half of the taxpayers in this country worry they will not have enough money to retire comfortably. This is up from 29% in 2007, a report from the Employee Benefit Research Institute found.

But the truth is, you can still get to your destination. "Not everyone is going to be able to retire exactly the way they want," says Denver financial planner Mark Brown. "But I talk to people all the time who overestimate the scope of their problem and underestimate their ability to do something about it."

Here are a few strategies for navigating five of the most common retirement roadblocks.

Roadblock #1: You're carrying a big mortgage

The problem: It used to be that Americans aimed to cross into retirement free of debt. But if you're in your fifties or sixties, chances are you aren't planning a mortgage-burning party anytime soon. The Joint Center for Housing Studies at Harvard says that 63% of homeowners ages 55 to 64 have mortgage or home-equity debt, up from 49% in 1989. In addition, a third of retirees carry credit card balances, reports the Federal Reserve. Such liabilities can be a dead weight in retirement -- you'll have to make the payments even if your expenses soar or your portfolio plummets.

Solution #1: Erase the debt if you can. Assuming you have cash savings in excess of the balances (besides emergency funds, that is), it usually makes sense to pay debts off around the time you retire. But zero out HELOCs and credit cards first. "You don't want a variable rate going into retirement," says Scottsdale financial planner Jacob Gold.

How 3 couples bust through retirement roadblocks

As for your mortgage, if you're two-thirds through the term, you're not benefiting much, if at all, from the interest write-off. And after taxes you're unlikely to earn more in risk-free investments than the cost of the debt, a recent Center for Retirement Research study found. That said, if you'd have to pull from tax-sheltered accounts to pay off the balance, you may want to consult a financial planner about whether doing so would be worth the tax bite.

Continue reading at CNN.com…

25 Best Places to Retire

The economic downturn has been especially difficult on retired taxpayers. Fortunately, there are some places in this country that are friendly to retirees. CNN Money.com put together a list of the 25 best places to retire at. You can find a section of the story below, or check out the full list here.

1. Durham, NC

Population: 223,284

% over 50: 25%

Median home price: $163,000

State income tax: 7.75%*

Where to take classes: Duke University

Durham would rank as a retiree Mecca even without Duke University's stellar lifelong-learning program. Residents enjoy four seasons -- but without them being too extreme. Homes are affordable, the area is dotted with golf courses and parkland, and the region is home to a renowned university medical center.

This former tobacco town also is a budding cultural haven. Duke's Nasher Museum of Art has a growing contemporary art collection. Concerts and Broadway hits, such as Billy Elliot and the Lion King, frequently make their way to the newly built 2,800-seat Durham Performing Arts Center.

2. Hanover, NH

Hanover, NH

Population: 8,516

% over 50: 25%

Median home price: $401,000

State income tax: 5%*

Where to take classes: Dartmouth College

New England is chock full of charming villages. But few are as welcoming to retirees as Hanover, home of Dartmouth College and its 20-year-old senior education program.

Outdoor enthusiasts can kayak on the Connecticut River or hike in the White Mountains. Winter, of course, brings 94 inches of snow on average, so residents make the most of the cold (five ski hills are within an hour's drive) or head south.

Continue reading at CNN Money.com…

More States Woo Retirees With Tax Breaks

From Forbes.com:

Last month, even as they slapped a new tax on hospitals, raised dozens of user fees and eliminated a low-income tax credit, Georgia legislators passed income tax relief for one group: well-off retirees. For residents 62 or older, Georgia already exempts from its 6% tax all Social Security and $70,000 per couple of income from pensions, retirement accounts, annuities, interest, dividends, capital gains and rents. But in 2012, the exemption for couples 65 and older will rise to $130,000, and by 2016 all their retirement income will be exempt--a break Governor Sonny Perdue championed as a lure for well-heeled seniors.

If you're looking for a domestic retirement tax haven, Georgia is hardly the only place worth considering. Seven states--Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming--don't tax personal income at all. New Hampshire and Tennessee tax interest and dividends but not other income. The rest of the states have broad income taxes but give old taxpayers breaks, some quite generous. A recent study by Karen Smith Conway of the University of New Hampshire and Jonathan C. Rork of Georgia State calculates that retirees pay, on average, only half the state income tax of working folks with the same income.

That means the best tax locales aren't necessarily the same for retirees as they are for working stiffs. Some states, such as New Jersey, soak taxpayers of all ages (particularly affluent ones) with stiff income, real estate, sales and estate taxes. But others with a more moderate tax burden might compensate for having no income taxes with high real estate levies. New Hampshire, with no sales tax and a narrow income tax, has among the highest real estate burdens in the nation. Consider, too, the condition of local finances and prospects for tax hikes.

Income Taxes

The most common exemption among states with an income tax is for Social Security benefits; 27 states and the District of Columbia don't tax them at all while the rest provide a partial exemption, according to tax publisher CCH. Three states--Illinois, Mississippi and Pennsylvania--also exempt all private and public pension payouts, including withdrawals from individual retirement accounts. Kentucky exempts up to $82,220 per couple in pension and IRA income.

IRS Taxes and the Elderly

These days it seems like the recession is affecting almost every American. Unfortunately, one of the groups being hit the hardest are elderly taxpayers. Recent studies are even showing that many retired citizens are being forced to rejoin the competitive work force in order to make ends meet. Some people mistakenly think that the IRS treats senior citizens unfairly, but this is not necessarily the case. As you will see, the IRS has a special set of laws designed to help elderly citizens in this country.

The Elderly or Disabled Credit

One specific credit available to struggling senior taxpayers is the Elderly or Disabled Credit. The exact amount of the credit will vary depending on your unique financial situation and is somewhat difficult to calculate. Basically, you will need to start with what the IRS calls your “initial amount” which will be between $3,700 and $7,500. Next subtract any non-taxable pensions or social security income, then reduce it by a percentage of your excess adjusted gross income. Finally, take that total and multiply it by 15% to find out the credit you quality for. As you can tell, calculating your credit is a tricky process and I highly recommend getting help from a qualified professional. However, if you do want to calculate it yourself then checkout IRS Publication 524.

Qualifying for the Credit

Essentially in order to claim the Elderly or Disabled Credit, you need to be either elderly or disabled. According to the IRS, you either need to be over the age of 65 at the end of the tax year you want to claim the deduction, or meet specific qualifications to be considered disabled. If you are on permanent and total disability, or had taxable disability income during the year then you may be eligible to qualify.

Social Security Taxes

Another issue facing elderly taxpayers in the U.S. is social security taxes. Oddly enough though, social security benefits were originally not considered taxable income. It was not until 50 years after the social security system was created that the IRS began levying taxes on them. Just like with regular income taxes, the percent of your social security income that you will need to pay to the IRS will vary widely depending on your income from other sources. In some cases this can be as much as 85% of your benefits, and in other cases you might not get taxed at all.

Private Retirement

It is safe to say that the tax advantages and disadvantages of private retirement are not so black and white. There are several different ways for a taxpayer to plan for their retirement, but most Americans usually go with either a traditional or Roth IRA. Generally speaking, when you go with a Roth IRA contributions are not tax deductible, but future withdrawals are not taxed. However, with a traditional IRA you can deduct your contributions from your taxable income, but you will have to pay taxes on future withdrawals. There are also specific rules regarding penalties for early withdrawals, and rules about being required to take minimum withdrawals once you reach a certain age. Since deciding on a retirement plan will affect the rest of your life, I highly recommend speaking with a financial planner or qualified expert to find the plan best for you.

Taxing Consumption vs. Income

Currently elderly Americans have a pretty good tax situation in this country. In fact, recent studies show that high-income senior households pay significantly less in taxes then non-elderly households in the same income bracket. However, if there were a major change in our tax structure, such as a value added tax or other type of consumption tax, then many experts predict senior citizens would bear an unfair financial burden.

Stimulus Benefits Could End Up Costing Retirees At Tax Time

Sandra Block of USAToday.com wrote an interesting article on how stimulus benefits could complicate the taxes of retirees. You can find a snippet of her post below, but the full text can be found here.

When lawmakers enacted the economic stimulus package this year, they included benefits for seniors. Smart move: Many retirees also have been hit hard by the economic downturn, and they vote in large numbers. Unfortunately, some of the tax headaches we discussed in an earlier column could also affect retirees.

Some examples of potential problems:

Taxpayers who receive a pension and have taxes withheld from their payments could end up owing money to the IRS next year.

In March, the IRS adjusted withholding tables to reflect the Making Work Pay credit, which is worth up to $400 for single workers, and up to $800 for married taxpayers who file jointly. The adjustments will apply to wages, but they'll also affect the amount withheld from pension payments. And that's a problem, because pension payments are ineligible for the credit, says Mark Luscombe, federal tax analyst for tax publisher CCH.

This won't be an issue for retirees who pay taxes on their pension payments each quarter instead of having their taxes withheld, Luscombe says. Likewise, individuals who receive a pension but also have a job may still qualify for the credit because they have earned income, he says. But retirees who have taxes withheld from their pensions and don't have any earned income may need to adjust their withholding to avoid owing money next year.

For information on how to avoid unpleasant surprises at tax time, go to www.irs.gov and search for Publication 919, "How Do I Adjust My Tax Withholding." The section titled "Retirees Returning to the Workforce" includes information for pensioners, and is relevant even if you're not going back to work.

Social Security beneficiaries who have earned income could end up receiving a larger credit than they're entitled to.

Next month, the Social Security Administration will deliver a one-time payment of $250 to more than 55 million Americans who receive Social Security benefits or Supplemental Social Security Income. For most beneficiaries, this won't create any problems. But seniors who receive Social Security benefits and also have a job could also end up owing the IRS money next year.

Here's why: If you're employed and have taxes withheld from your paycheck, you'll also receive the Making Work Pay tax credit. But the maximum amount you can receive from both programs is $400, says Michael O'Toole, director of publications and government relations for the American Payroll Association.

"If a single person is getting $400 in reduced withholding from a job, and getting the $250 economic recovery payment because they're collecting Social Security, they're going to be underwithheld by $250," he says.

As a result, Social Security beneficiaries who have jobs may also need to adjust their withholding.

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Retirees Can Reap Some Tax Savings In Down Year

From The Associated Press:

Retirees reeling from the impact of the stock market's ruinous slide can take some solace from recent tax-law changes to help minimize their losses.

While the new options are no cause for wild celebration, taking advantage of them offers the chance to save on taxes in 2009 and regain some control over one's finances.

"Even with the market having gone down, you have the ability to cut some of your losses by using tax breaks," said Mitch Franklin, assistant professor of accounting at Syracuse University. "That can make your investment losses maybe a little less painful."

The biggest break for seniors is the one-year suspension of the required minimum distribution (RMD) rule, which Franklin called "a bit of light in this doom."

The rule mandates that those age 70 1/2 or over take a specified amount of money out of their IRA, 401(k) or similar retirement accounts annually. The total is based on their age and account value at the end of the previous year. But legislation passed by Congress late last year temporarily waives the whopping penalty for failing to take out the money: normally 50 percent on the amount that should have been taken out.

That gives seniors flexibility on how much to withdraw from their retirement accounts. They could choose not to touch their account and give their balance time to recover from the market downturn. They could take out whatever they need to help get by. Or they could take a distribution and just sit on it — getting it out of the account in order to lessen next year's required withdrawal.

Some Breathing Room for IRAs

From the Wall Street Journal.com:

Retirees who ignore the annual distributions they are required to take from their individual retirement accounts usually run a big risk -- in the form of a 50% excise tax on the amount they should have withdrawn. But not next year.

On Tuesday, President Bush signed legislation that suspends the rule requiring older Americans to take withdrawals from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s.

But there are hitches. The suspension lasts for just one year, 2009. And while intended to give beaten-down retirement accounts time to rebound, the new law may also present confusion, particularly for those just starting to take required withdrawals.

"The [existing] rules are confusing enough," says Ed Slott, an IRA consultant in Rockville Centre, N.Y. "Now, more people than ever are going to get tripped up."

Here are answers to questions about how the new law will affect taxpayers in 2009 and beyond.

Q: How do the existing rules governing IRA withdrawals work?

A: Those who contribute to tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, don't pay income tax on the money they put into these plans. But eventually, Uncle Sam requires them to take the money out, and pay income taxes in the process. "The government gives you a tax break when you make your contributions. When you retire and are presumably in a lower tax bracket, it wants the tax revenue it deferred," Mr. Slott says.

Normally, IRA owners must begin withdrawing money from these accounts by April 1 of the year after they turn 70½. That means that someone who turned 70½ in 2008, for example, has until April 1, 2009, to take his or her first required distribution. To calculate how much to withdraw, look at your account balance as of the previous Dec. 31, and then divide that figure by your remaining life expectancy. (Life-expectancy data can be found in actuarial tables in IRS Publication 590.)

You can always withdraw more. But if you take less, you will be subject to the 50% penalty. These requirements also apply to 401(k)s and some other employer-sponsored plans, but not to defined-benefit pension plans or Roth IRAs. (If you are still working, you aren't required to take distributions from your current employer's retirement plan.)

Q: What impact will the new law have?

A: The new law suspends required distributions in 2009. This gives those who can afford to leave their nest eggs alone a better chance of recovering some of the losses they sustained this year. Why? "They'll have more dollars working for them in the event of a stock market rebound," says Elizabeth Drigotas, a principal at Deloitte Tax.

Unless Congress decides to extend the moratorium on mandatory distributions, those over age 70½ -- along with those who have inherited IRAs or 401(k)s -- will be forced to resume taking withdrawals in 2010.