Why tax time is a good time to check your retirement plan

Tax season is often met with heavy sighs as Americans gather the necessary paperwork and prepare for the annual deep dive on their finances. While it can be a tedious process (and painful if you have to pay additional taxes), tax season is also a good time to give yourself a financial checkup – particularly if you are approaching retirement age.

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States where Americans pay the highest in state income taxes
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States where Americans pay the highest in state income taxes

California

State income tax: 1% to 13.3% 

Maine

State income tax: 5.8% to 10.15%

Oregon

State income tax: 5% to 9.9%

Minnesota

State income tax: 5.35% to 9.85%

Iowa

State income tax: 0.36% to 8.98%

New Jersey

State income tax: 1.4% to 8.97%

Vermont

State income tax: 3.55% to 8.95%

Washington, DC

State income tax: 4% to 8.95%

New York

State income tax: 4% to 8.82%

Hawaii

State income tax: 1.4% to 8.25%

Wisconsin

State income tax: 4% to 7.65%

Idaho

State income tax: 1.6% to 7.4%

South Carolina

State income tax: 0% to 7%

Connecticut

State income tax: 3% to 6.99%

Arkansas

State income tax: 0.9% to 6.9%

Montana

State income tax: 1% to 6.9%

Nebraska

State income tax: 2.46% to 6.84%

Delaware

State income tax: 2.2% to 6.6%

West Virginia

State income tax: 3% to 6.5%

Georgia

State income tax: 1% to 6%

Kentucky

State income tax: 2% to 6%

Louisiana

State income tax: 2% to 6%

Missouri

State income tax: 1.5% to 6%

Rhode Island

State income tax: 3.75% to 5.99%

Maryland

State income tax: 2% to 5.75%

North Carolina

State income tax: 5.75%

Virginia

State income tax: 2% to 5.75%

Oklahoma

State income tax: 0.5% to 5.25%

Massachusetts

State income tax: 5.1%

Alabama

State income tax: 2% to 5%

Mississippi

State income tax: 3% to 5%

Utah

State income tax: 5%

Ohio

State income tax: 0.495% to 4.997%

New Mexico

State income tax: 1.7% to 4.9%

Colorado

State income tax: 4.63%

Kansas

State income tax: 2.7% to 4.6%

Arizona

State income tax: 2.59% to 4.54%

Michigan

State income tax: 4.25%

Illinois

State income tax: 3.75%

Indiana

State income tax: 3.3%

Pennsylvania

State income tax: 3.07%

North Dakota

State income tax: 1.1% to 2.9%

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As you work through 2018 taxes, take a step back, reassess your overall financial goals, review your current investment strategy, and more specifically, make any necessary changes to stay on track for your retirement plan.

Here are a few things to think about as you review your taxes and prepare for retirement in the next few years:

  • Maximize account contributions.
  • Tapping retirement funds.
  • Review investment risk.

Max Out Your Retirement Account Contributions

While you are reporting on your contributions to various retirement accounts in 2018, check to see if you're really contributing the maximum amounts possible.

For both Roth and traditional individual retirement accounts (IRAs), the 2019 contribution limit is $6,000, up from $5,500 in 2018. What's more, all of us in the 50-plus crowd can add another $1,000 as a catch-up contribution. There are, however, income limits on making contributions to a Roth IRA.

The maximum contribution for 401(k) accounts is also higher in 2019. For those under 50, the maximum is now $19,000 ($18,500 in 2018). If you're 50 or older, the contribution limit is now $25,000, up from $24,500 in 2018.

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Average tax refund in every U.S. state
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Average tax refund in every U.S. state

Texas

Average refund: $3,206

Number of refunds: 10,087,693

Total income tax refunded: $32.3 billion

Louisiana

Average refund: $3,115

Number of refunds: 1,611,412

Total income tax refunded: $5 billion

Connecticut

Average refund: $3,099

Number of refunds: 1,396,609

Total income tax refunded: $4.3 billion

Oklahoma

Average refund: $3,098

Number of refunds: 1,300,577

Total income tax refunded: $4 billion

New York

Average refund: $3,059

Number of refunds: 7,712,210

Total income tax refunded: $23.6 billion

New Jersey

Average refund: $3,013

Number of refunds: 3,479,321

Total income tax refunded: $10.5 billion

Wyoming

Average refund: $2,989

Number of refunds: 214,649

Total income tax refunded: $641.6 million

North Dakota 

Average refund: $2,983

Number of refunds: 277,422

Total income tax refunded: $827.4 million

Florida

Average refund: $2,933

Number of refunds: 7,854,538

Total income tax refunded: $23 billion

Mississippi

Average refund: $2,922

Number of refunds: 1,018,429

Total income tax refunded: $2.97 billion

California

Average refund: $2,911

Number of refunds: 13,594,703

Total income tax refunded: $39.5 billion

Washington D.C.

Average refund: $2,900

Number of refunds: 277,399

Total income tax refunded: $804.5 million

Illinois

Average refund: $2,900

Number of refunds: 4,973,653

Total income tax refunded: $14.4 billion

Maryland

Average refund: $2,861

Number of refunds: 2,329,288

Total income tax refunded: $6.7 billion

Massachusetts

Average refund: $2,850

Number of refunds: 2,704,250

Total income tax refunded: $7.7 billion

Alaska

Average refund: $2,843

Number of refunds: 276,887

Total income tax refunded: $787 million

Nevada

Average refund: $2,830

Number of refunds: 1,111,952

Total income tax refunded: $3 billion

Georgia

Average refund: $2,832

Number of refunds: 3,606,774

Total income tax refunded: $10.2 billion

Alabama

Average refund: $2,802

Number of refunds: 1,650,125

Total income tax refunded: $4.6 billion

Virginia

Average refund: $2,771

Number of refunds: 3,129,030

Total income tax refunded: $8.7 billion

Arkansas

Average refund: $2,759

Number of refunds: 989,288

Total income tax refunded: $2.7 billion

Tennessee

Average refund: $2,726

Number of refunds: 2,465,816

Total income tax refunded: $6.7 billion

Utah

Average refund: $2,681

Number of refunds: 1,033,141

Total income tax refunded: $2.8 billion

Washington

Average refund: $2,681

Number of refunds: 2,749,362

Total income tax refunded: $7.4 billion

Arizona

Average refund: $2,672

Number of refunds: 2,244,925

Total income tax refunded: $6 billion

Kansas

Average refund: $2,665

Number of refunds: 1,044,275

Total income tax refunded: $2.8 billion

New Mexico 

Average refund: $2,657

Number of refunds: 724,549

Total income tax refunded: $1.9 billion

South Dakota

Average refund: $2,651

Number of refunds: 321,372

Total income tax refunded: $852 million

West Virginia

Average refund: $2,649

Number of refunds: 649,049

Total income tax refunded: $1.7 billion

Kentucky

Average refund: $2,648

Number of refunds: 1,590,274

Total income tax refunded: $4.2 billion

Delaware

Average refund: $2,648

Number of refunds: 365,749

Total income tax refunded: $968.4 million

Rhode Island

Average refund: $2,643

Number of refunds: 436,490

Total income tax refunded: $1.1 billion

Pennsylvania

Average refund: $2,643

Number of refunds: 5,071,264

Total income tax refunded: $13.4 billion

Colorado

Average refund: $2,636

Number of refunds: 2,014,233

Total income tax refunded: $5.3 billion

North Carolina

Average refund: $2,629

Number of refunds: 3,580,471

Total income tax refunded: $9.4 billion

Nebraska

Average refund: $2,615

Number of refunds: 711,103

Total income tax refunded: $1.8 billion

Indiana

Average refund: $2,612

Number of refunds: 2,577,994

Total income tax refunded: $6.7 billion

Iowa

Average refund: $2,602

Number of refunds: 1,141,151

Total income tax refunded: $3 billion

New Hampshire

Average refund: $2,602

Number of refunds: 558,359

Total income tax refunded: $1.4 billion

Missouri

Average refund: $2,601

Number of refunds: 2,220,029

Total income tax refunded: $5.7 billion

South Carolina

Average refund: $2,569

Number of refunds: 1,719,299

Total income tax refunded: $4.4 billion

Hawaii

Average refund: $2,564

Number of refunds: 535,763

Total income tax refunded: $1.4 billion

Michigan

Average refund: $2,560

Number of refunds: 3,776,668

Total income tax refunded: $9.7 billion

Ohio

Average refund: $2,517

Number of refunds: 4,570,589

Total income tax refunded: $11.5 billion

Minnesota

Average refund: $2,516

Number of refunds: 2,112,212

Total income tax refunded: $5.3 billion

Idaho

Average refund: $2,457

Number of refunds: 561,133

Total income tax refunded: $1.4 billion

Wisconsin

Average refund: $2,436

Number of refunds: 2,236,886

Total income tax refunded: $5.4 billion

Montana

Average refund: $2,401

Number of refunds: 372,817

Total income tax refunded: $895 million

Oregon

Average refund: $2,398

Number of refunds: 1,431,924

Total income tax refunded: $3.4 billion

Vermont

Average refund: $2,392

Number of refunds: 254,192

Total income tax refunded: $608 million

Maine

Average refund: $2,336

Number of refunds: 509,896

Total income tax refunded: $1.2 billion

Average tax refund by state
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Another benefit of contributing to traditional IRAs and 401(k) accounts is that you can save money on taxes now, though you will still have to pay income tax when you start to draw down the accounts in retirement. For Roth IRAs, you've already paid taxes on the money going in, so those contributions and earnings coming out in retirement are generally income tax free.

The easiest way to boost your contributions to these accounts is to make them automatic. If you don't see the money in the first place, you won't miss it. That can make it a little easier to increase your monthly contributions and make the most of catch-up contributions. Additionally, if your employer offers a match to employee 401(k) accounts, be sure to max that out – otherwise you're turning down free money.

If you're getting a tax refund this year, consider putting that toward a retirement account to help easily boost your contributions.

Discuss How You Will Begin to Take Your Retirement Income

A key consideration as you prepare for retirement is knowing exactly how much you will need each month, how you will receive income and from which accounts the money will come. Keep in mind that you will still have to pay taxes on the income from many of these accounts and that Social Security income can be taxed as well, depending on how much overall retirement income you receive. If you're married, how you file taxes also plays a role. Be sure to check with your tax professional on how to navigate this.

A retirement income strategy is critical. Work with your financial professional and a qualified tax advisor or attorney to help answer some key questions. Should you defer Social Security payments and start to draw down your IRAs right away? If you have an annuity, how will payouts impact your income and tax strategies? How much can you safely withdraw from your stock and bond portfolios without risking your long-term retirement plans?

Remember that if you're turning 70½ this year, you are required by the government to take required minimum distributions (RMDs) from most qualified retirement accounts. This means you must start to draw down your traditional IRAs. These RMDs then become part of your taxable income. Other qualified retirement plans, including 401(k)s, also require RMDs. Be sure to check with your plan administrator and tax professional for help navigating RMDs.

Review Risk and Make Sure You Are Protected

As people get closer to retirement, they become more risk adverse in order to preserve their hard-earned funds as much as possible. Pulling back from exposure to the stock market and seeking out financial products that offer a level of protection from downside risk are two steps to consider.

Work with your financial professional to assess your current risk exposure and determine if it makes sense to increase investment diversification in your portfolio, particularly if you are approaching your target retirement age. Keep in mind diversification does not ensure a profit or protect against loss.

Tax season offers a chance to confront your finances head-on whether you like it or not – but that doesn't have to be a bad thing. Use this time when you are already neck-deep in financial matters to consider your retirement goals and ensure you're taking the appropriate steps now to create a comfortable retirement in the future.

Disclosures: This article is for general informational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Co. of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Clients are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations. Distributions are subject to ordinary income tax and, if taken prior to age 59½, a 10 percent federal additional tax. Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity's features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan. Guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions. Products are issued by Allianz Life Insurance Co. of North America. Variable products are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. Product and feature availability may vary by state and broker/dealer.

Copyright 2019 U.S. News & World Report

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