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1. Mismanagement of retirement accounts

Transitioning to retirement requires a thorough review of your savings vehicles, including IRAs, taxable investment accounts, savings accounts, pensions, and 401(k) plans.

If you possess multiple 401(k) accounts from previous employment stints, consolidating them into a single, streamlined IRA may offer the most advantageous strategy.

Above all else: avoid dipping into 401(k)s or Roth IRAs before age 59.5, which carries a double whammy of big penalties and stalled momentum for your money.

Also, consider professional help. Hiring a certified financial planner or advisor can help you gain control of your overall asset picture, as well as the tax consequences of all those assets.

An advisor can provide a comprehensive financial picture and help you construct your monthly income to stretch your assets long into retirement.

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2. Social Security taxes

Paying into Social Security allows you to reap the benefits of that safety net later in life. But there’s a good chance you’ll pay taxes on them.

Social security benefits are subject to federal income taxes if your combined income exceeds a certain threshold. Combined income includes not only your taxable income, but also tax-exempt interest and half of your Social Security benefits.

For retirees who rely heavily on Social Security as their main source of income, these taxes can erode a substantial portion of their benefits.

Moreover, the tax rates on Social Security benefits can be surprisingly high, potentially reaching up to 85% of your benefits depending on your income level. This means that retirees who haven't prepared may find themselves with a significantly reduced income in retirement, forcing them to dip into their nest eggs more often than anticipated.

Don’t forget, too, that plenty of U.S. states still tax Social Security benefits. If you live in Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont or West Virginia, prepare to pay up.

To mitigate the impact of Social Security taxes on their retirement nest eggs, investors should incorporate tax planning into their overall financial strategy.

That includes diversifying income sources — such as utilizing Roth IRAs or taxable brokerage accounts that can reduce reliance on Social Security — and optimizing retirement or Social Security withdrawal strategies to minimize taxable income in certain years. Delaying Social Security as long as possible, for instance, produces a bigger payout that could help absorb a tax bill.

For each year beyond your full retirement age — either 66 or 67, depending on your birth year — that you postpone collecting Social Security benefits, your benefit amount can increase by as much as 8%. By waiting until age 70, you qualify for the maximum benefit, potentially reaching up to 132% of your full retirement benefit.

3. Medicare late enrollment penalties

While the majority of today's workforce won't reach their full Social Security retirement age until 67, it's essential to note the critical timeline for filing for basic Medicare.

Individuals must apply for basic Medicare within the three months before or after turning 65 to avoid penalties, which can range from 1% to 10% for each 12-month delay in enrollment.

Medicare comprises various components, including Parts A, B, C, and D, as well as supplemental plans extending to Part N. While applying for Medicare may appear intimidating, researching the process and required paperwork can give you a leg up.


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Chris Clark Freelance Contributor

Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.


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