Most individuals spend their entire lives earning, not only to pay expenses and live but also so they can retire and do all the activities they enjoy but lack the time for while working. When you were working, you paid taxes on your salary, so you could enjoy your government pension tax-free, but that isn’t always the case. How is income in retirement taxed, then? Can you cut or avoid these taxes? Much depends on your retirement savings. Pensions taxed? Most retirees place their money in a 401(k) or IRA. Some retirees deposit their money in a 403(b). All retirement accounts are taxed. Regardless of the report, there seem to be two different ways to collect retirement income. You can withdraw the money gradually or all at once. How do taxes differ? If you start the money slowly, the overall tax bill won’t be as high, but you’ll still have to pay the tax each year. When you have enough money in your savings account to withdraw every so often over several years, you will incur taxes on every occasion you draw. A lump sum? The decision to withdraw the money in one single amount spares you from paying that income in taxes for several years, but it also entails a more significant tax payment the year you take it. This is because taxes are applied at the rate you were taxed while working. E.g., if you paid 10% in federal taxes while working, your retirement fund will be assessed at the same rate. So while taking a lump sum can result in an uncomfortable (and often difficult to pay) tax bill, you won’t be charged until you make the withdrawal. Why IRA and 401(k) rules matter If you’re savvy, you’ve been putting extra money into these retirement plans while you’re still working to decrease your annual taxes. That’s great, but when you retire, you’re stuck paying taxes on all that extra money. You can bet the tax guy will get his money. As a result, many people start a side business or a second career they can keep in retirement. How to reduce retirement income taxes You may wonder if you can lower the taxes you’ll be due on your retirement income. Roth IRAs have tax advantages but are not all roses and unicorns. If you administer these funds appropriately, you can withdraw tax-free retirement income. However, you must follow the rules or face punishment. You can’t remove a dime from your Roth IRA until you’ve had it for five years. The first donation starts the clock, so don’t withdraw funds for at least five years (and a few days) after that date. Tax Implications Roth IRA donations aren’t tax-deductible. Remember how contributing to an IRA or 401(k) reduces your working tax burden? Not here. It won’t cut your tax burden, but you won’t pay taxes on retirement withdrawals. Like the other accounts, there is a 10% early retirement penalty. Many people are willing to suffer with modest difficulties to avoid paying taxes on their retirement income, especially when they’ve already paid their income while working, so popular is the Roth IRA. Is SSI taxable? You may think Social Security is exempt from taxes in retirement. However, social security is taxable in some situations. This income was once tax-free, but those days are long gone. Anyone with a $25,000 or more temporary payment must pay social security taxes. Your tax bracket depends on your provisional income. Provisional income: Your AGI plus tax-exempt income and half of your Social Security income for the year. As you can see, life will feel grim if your annual provisional income is below $25,000. Anyone who makes enough to be comfortable pays Social Security taxes. How Can I Lower My Taxes? As discussed, consider a Roth IRA for your retirement income. Because of increasing taxes, you may want to avoid 401(k) or 403(b) accounts. Instead, take a Roth IRA lump payment if you’re anxious about paying back Social Security later. You won’t receive more than 15% of your Social Security income that year, but you can collect benefits in subsequent years at a lower tax rate. This strategy can save you the most money, even though you’ll still have to pay taxes on some retirement income, like Social Security. However, it is not easy to manage.
Contact Information:
Email: [email protected]
Phone: 9568933225
Bio:
Rick Viader is a Federal Retirement Consultant that uses proven strategies to help federal employees achieve their financial goals and make sure they receive all the benefits they worked so hard to achieve. In helping federal employees, Rick has seen the need to offer retirement plan coaching where Human Resources departments either could not or were not able to assist. For almost 14 years, Rick has specialized in using federal government benefits and retirement systems to maximize retirement incomes. His goals are to guide federal employees to achieve their financial goals while maximizing their retirement incomes.
