A majority of middle-income baby boomers and retirees have significant gaps in their understanding of how federal taxes will impact their retirement finances, according to a new study by the Bankers Life Center for a Secure Retirement.
More Americans know how lottery winnings are taxed than how Social Security, IRAs, Roth IRAs and 401(k)s are taxed, the study found.
The “Retirement Tax Considerations for Middle-Income Americans” study focused on 1,000 Americans over the age of 50 with an annual household income between $25,000 and $75,000.
Nearly one-quarter of respondents said they hate filing tax returns, but only 38 percent said they work with a tax preparer. More than half said they file their own taxes, with 31 percent saying they use tax-preparation computer software. Eighteen percent said they complete their tax returns without any external guidance at all.
Fifty-seven percent of those polled for the study said they didn’t know that they had to begin claiming money from their traditional IRAs and 401(k)s at age 70 ½.
A majority of them also were unaware that they could withdraw funds from a traditional IRA without penalty to pay for health insurance while unemployed, to pay for college expenses, buy a home or pay for medical expenses, the study found. Only 2 percent of those surveyed were aware of all four exceptions.
Most middle-income Americans couldn’t identify the tax deductions available to them in retirement.
Fifty-six percent didn’t know that if you are blind, you can take a higher standard deduction, and 68 percent couldn’t correctly identify age 65 as the age at which a higher standard deduction is granted. Ninety percent were unaware that, in some cases, they may claim their parents living outside the household as their dependents for tax purposes.
Research for the study was conducted in February by The Blackstone Group.
The Bankers Life Center for a Secure Retirement is a research and consumer education program.