People can begin drawing retirement savings from qualified accounts at age 59 1/2 or start receiving Social Security benefits at age 62. But there are significant tax advantages for late retirement when that savings could continue to grow.
Here are six tax advantages of later retirement:
Social Security retirement benefits can be taken when you turn 62, but they are reduced by about 25 percent, according to the Social Security Administration
. For each year a worker postpones claiming retirement benefits, they go up by about eight percent.
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Delaying retirement will increase the Social Security amount if your salary increases during the years retirement is postponed. The benefits are based not only on the age you begin to draw money for retirement, but also the amount of money you made while working, U.S. News & World Report pointed out
Even if a person starts drawing Social Security at age 62 or older, continuing to work will continue to be a tax advantage because any reduction in Social Security amounts will be credited and will be paid in the form of increased benefits later. When a person reaches full retirement age, or stops working altogether, the benefit amount is recalculated based on the person’s income.
By delaying retirement, people avoid penalties for withdrawing funds from qualified retirement plans, Investopedia said
. Early withdrawal at under age 59 1/2 results in a 10-percent penalty. Other investment instruments may have additional penalties.
Postponing retirement to later than the full retirement age allows people to put away more money for retirement and avoid spending the money they’ve already socked away. If a person’s income level is lower than it was previously, it’s a good time to convert some pre-tax investments to after-tax retirement plans and pay lower taxes based on the lower income. When retirement time comes, these monies can be withdrawn without penalty or taxes.
Delaying retirement gives people an opportunity to research the state and local taxes for their own area as well as for other places where they may wish to move, U.S. News & World Report said. Many states have no state income tax, which could be a significant tax advantage for late retirement.
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