I have recently noticed that there’s a group of taxes that are often overlooked when my clients discuss their plans for retirement. Some even think that their retirement income will be free from income taxes altogether. Unfortunately, that is not the case. Not planning ahead may mean that you end up paying more IRS taxes than you need to, and could make retirement a whole lot less comfortable. Read below to see some of the top taxes that might take a hefty bite out of your post-work income.
Taxes on Social Security Income
A part of your Social Security benefits could be taxable, depending on your marital status and total income. To get a rough estimation of your potential tax liability, take your projected income during retirement and add half of your Social Security benefits. The figure you're left with is your adjusted gross income or AGI. Add your tax-free income, and you get your provisional income.
If your provisional income exceeds $25,000 and you're single, then up to half of your Social Security income is eligible to be taxed. If you are married, then the figure must exceed $32,000.
But that’s not all. 85% of your total Social Security benefits are eligible for taxation if you are single and have a provisional income over $34,000, or if you are married and earn over $44,000.
Other Taxes on Retirement Income
401(k)s and IRAs are two other revenue sources that many retirees use. While the contributions to these plans are tax-free, the distribution isn’t if you begin withdrawing before you reach 59. If you’re older than 59 and have had a Roth IRA or Roth 401(k) for at least five years, then withdrawals are tax-free.
How To Save On Retirement Taxes
One strategy is to limit withdrawals of significant funds from your retirement accounts in years when you claim a large number of deductions, which temporarily reduce your tax rate. You could also convert your traditional IRA to a Roth IRA if you wish to leave some of the funds in it as part of your inheritance. Transitioning to a Roth IRA makes the tax burden much easy on those who inherit your wealth.
Our retirement planning calculator can help you see how much you'll need to save to have a comfortable retirement. It's always a good idea to consult with your financial advisor about retirement matters; they are up-to-date with the latest market developments and laws which may influence your retirement planning.
There is much to learn and research about retirement planning. Knowledge is the most valuable tool in your personal financial planning journey. The library of articles and calculators on my website is a good place to start. Have questions? Contact me.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.