One thing that will not change after you retire is your required tithe to the IRS. That probably doesn’t surprise anyone, but many people fail to account for tax requirements during their golden years.
Just because your annual income will decrease, that doesn’t mean you won’t have some hefty taxes to pay.
Here are a few of the tax issues that you must be aware of, and thus prepare for, during retirement.
IRA and 401(k)
The taxes on these investments were deferred as an incentive to put money into them. Withdrawals from these accounts will be taxed at the normal rate for you income. There are several instances where you will be driven into a higher income tax bracket when you make these withdrawals on top of any Social Security benefits you are receiving. Additionally, the IRS requires that you withdraw a certain amount once you reach 70 ½.
Social Security benefits will be tax free unless… The “unless” means that if you have any income other than your monthly stipend, up to 85% of your Social Security benefit can be taxed. The IRS has a formula to help determine if your check will be taxed. It goes a little something like this: adjusted gross income plus half of any Social Security benefits plus any tax-free income. If those numbers exceed $34,000 for an individual or $44,000 for a married couple filing jointly, you will owe taxes on a portion of your Social Security benefits. Many people don’t realize this, and surprise taxes are not a good surprise for anyone!
Normal investments should have been taxed all along, but a few items are not. Investing in a municipal bond is a good idea because the interest can accrue tax free and the original investment is usually made post-tax. The down side is that the income from the investment can open your monthly government benefit to taxes. Putting your money into a tax-sheltered annuity can protect your benefits, but these investments usually carry such a heavy fee scale that they rarely make sense.
Any solid retirement plan must account for tax implications. If you do not think that you can develop a plan on your own, then talk with your investment counselor. If you do not have one, call your local Council on Aging or contact AARP. You should be able to get some advice from one of those groups.
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Author J. Coffey is a personal finance writer who spent a great many years living paycheck to paycheck. Now he’s finally out of debt and saving for retirement. You can read more of his work at www.Repaid.org, where he’s a senior contributor.