Taxes and Retirement: What Women Need to Know

When it comes to women and money, there are some unique challenges to consider. Take the fact that women still earn 80 cents to every dollar that a man makes. Also consider the fact that 40% to 50% of marriages end in divorce.

Some women are opting out of the workforce to raise families, while other women are the primary breadwinners in their family. On top of all that, according to data from the Population Reference Bureau, women tend to outlive men — in every single country.

As you can see, there are so many factors that can affect women's finances. Because of these, it's especially important that women take charge of their financial future and come up with a tax-savvy retirement strategy.

What you need to know

There are a variety of ways you can save for retirement, but the key is to pick a strategy and be consistent, so you can build wealth over time. Since women live longer, it's critical to start now and think ahead about your long-term financial goals.

1. Consider tax-deferred products to lower your tax burden now

If you're looking to reduce some of your tax burden now, look into tax-deferred products, such as IRAs and 401(k)s, as well as annuities. Using these retirement vehicles, your assets can grow tax-free until it's time to take money out of the accounts.

Why is this important?

The federal taxes you pay each year can take a bite out of your income both now and in the future, affecting your financial goals for retirement.

2. Take a tax-diversified approach

This strategy involves using different types of retirement vehicles to help lower your tax obligations, whether now or in the future. For example, you can put your money in vehicles that are:

• Taxed now — things like stocks and mutual funds, as well as Certificates of Deposit (CDs). Investing in these can have tax consequences each year.
• Taxed later — retirement vehicles like IRAs, 401(k)s, 403(b)s and annuities. These options have important guidelines to consider and may have certain penalties if you withdraw funds early.
• Tax-advantaged — Roth IRA accounts, municipal bonds and life insurance are considered tax-advantaged and have certain tax perks.

Tip: Think about your lifestyle, income, current financial goals and future financial goals when considering your investments. Does it make more sense to be taxed now or later?

Which retirement vehicles will work best for your specific situation?

A long-term plan

According to Social Security Administration data, a woman who is 65 today can expect to live to be 86.6 years old. Not only that, but 25% of people who are 65 will live past the age of 90, while 10% will live past the age of 95.

If you're single...

You're on your own to save for your financial future. While that can have its own challenges, there are things you can do to get ahead.

The first step is to save as much as you can for your retirement, while optimizing your tax strategy. The key is to fund your various retirement vehicles consistently to reap the most benefits.

It's likely you'll want to max out your 401(k) and IRA retirement contributions, while also investing in things like mutual funds. Taking a diversified approach can help limit your risk while also getting the most out of your investments.

You also need to understand how your various investments affect your individual tax situation. Talking with a financial advisor can help you figure out your best options.

If you're married…

By age 50, more than 90% of people will marry. The partnership of marriage can be a delicate financial balancing act. You want to make sure you are in the know regarding the state of your finances and that you can take them over, should something happen to your spouse. Having a life insurance policy can help make sure that your bases are covered.

When it comes to taxes — are you filing jointly or separately? It's important to know how your filing choice may affect Social Security benefits taxation, pension plans and more. All of this could have an impact on what you owe in taxes and may also affect your future income.

If you have left the workplace to take care of your family, you may still contribute to an IRA. If you file jointly, plus your spouse has earned income, you can save for the future and also take advantage of some tax benefits.

Tip: Sit down with your partner to go over whether you file jointly or separately. What are the pros and cons? Does your current decision align with both of your future retirement goals?

If you're widowed…

Given that women outlive men in every single country, it's not a surprise that many women could find themselves in the situation of being a widow. The emotional burden alone is heavy. And dealing with all the financial issues around losing your spouse can be very challenging.

• First, look into Social Security survivor benefits to see if you're eligible.
• Check on any lump-sum life insurance payments you may be entitled to receive.
• If you are a beneficiary on a retirement account or any other account, or entitled to a defined benefit pension plan survivor benefit, get in touch with the provider in order to get access. It's important to figure out next steps on how you want to proceed as a beneficiary.
• If your spouse was part of a defined contribution plan like a 401(k), you will inherit the 401(k), unless a waiver was signed to indicate otherwise. Consider how you want it to be distributed and consult with a tax professional to understand how it can affect your taxes.

If you're divorced…

As noted above, 40% to 50% of marriages end in divorce, so heading into retirement as a divorcee is more common than you might think. While divorce can be emotionally distressing, it can also wreak havoc on your finances.

Here are some things to consider:

• Alimony needs to be reported as income on your tax return if you were divorced prior to 2019.
• If you're paying alimony, you may be able to use it as a tax deduction if the divorce was final prior to 2019.
• There are other alternatives to consider such as Alimony and Maintenance Trusts and lump sum payments. These options may be tax-advantaged.

   

Bottom line

It's important, as a woman, for you to take ownership of your financial situation so that you are prepared both now and in the future. Given that so many things can change in relationships, families and lives, it's critical to build a strong foundation for your future.

You can do that through preparing for retirement and making tax-savvy decisions. Your financial plan should be evolving as your life does, so it can continually support you in whatever stage of life you are.

Melanie Lockert is a freelance writer and event planner living in Los Angeles. She is the co-founder of Lola Retreat, which is focused on empowering women with their money.

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