Some people decide to continue working as long as they can and wait for a late retirement. This has its advantages, but it may also have tax disadvantages, depending on how a person handles retirement planning.
Here are four possible drawbacks of later retirement:
Delaying retirement may mean that people also delay drawing Social Security retirement benefits. While that will bring in a higher monthly benefit amount each year until the age of 70, there is no additional benefit after that because the full retirement amount has been maxed out. Delaying longer doesn’t necessarily provide more money. Also, while monthly Social Security checks are larger when retirement is delayed, there also will be fewer checks, The Motley Fool pointed out
. There are also drawbacks to taking Social Security benefits while continuing to work. This could put a person in a higher tax bracket and paying more in income tax because of the additional income, U.S. News & World Report noted
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People who wait till late retirement to draw from their qualified retirement plans, such as IRAs, and Social Security at the same time might find themselves in a higher tax bracket. One solution is to take withdrawals after age 59 1/2 from a retirement plan, and then receive Social Security benefits later on to lower the taxable income, according to Kiplinger
By continuing to work, income level stays high. However, late retirement planning could result in more taxes later on with tax-deferred accounts. Converting pre-tax retirement accounts to after-tax plans, such as a Roth IRA, can lower the tax rate. To avoid the tax disadvantages in late retirement, convert an IRA to a Roth IRA, which is taxed during the working years and can be withdrawn without taxes.
4. Tax disadvantages may also occur according to a retiree’s residence in late retirement. Some states have lower state or local taxes than others. Many states do not require income tax or may have a lower cost of living than other places, according to U.S. News. A move to one of those states could result in a major reduction in taxes and expenses.
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