If you have an effective retirement plan, it will consider your taxes after retirement. Unfortunately, many plans do not consider how your taxes will be affected by your changes in employment and where your money now originates. You can avoid these surprises by using careful tax planning strategies along with your retirement goals.
Kaufmann Advisors can look over your retirement plan to determine where you may have tax issues. There are, however, some general tips that you should keep in mind as you design your retirement plan.
Your retirement savings plan will likely be where most of your income comes from in retirement. Some retirees do consulting work on the side or work part time, but most will enjoy their non-working years by living off of savings. What you may not have planned for, however, is that payouts from your retirement savings plans can be taxed as well. This can cut down on your allowable living expenses and cause serious problems if you have not planned carefully.
If your retirement savings vehicle is a Roth account, then you will likely not need to worry about taxes because you paid taxes on this money already. That means that you will not need to pay taxes again when the Roth IRA pays out.
Using a traditional IRA or a 401(k) may have different tax treatment. These accounts were funded with pre-tax dollars, so you will need to pay income taxes on them as you take these funds out of the account.
You should also keep in mind that some retirement savings accounts have minimum withdrawal amounts that you must satisfy after you reach a certain age. Failure to meet this withdrawal amount can result in a tax penalty.
For those who only live off of Social Security benefits, they will likely not be taxed on these payments. However, if you have planned carefully, Social Security will not be your only income in retirement. In addition, there is a very real possibility that Social Security will no longer be available to younger generations as they reach retirement age.
Social Security benefits can be taxed if your income from other sources reaches over a certain limit. In fact, up to 85 percent of the benefits will be taxed for the upper income levels. Income includes income from all sources, including your retirement benefit accounts or investment income.
As a working adult, you have had likely had your required tax payments withheld from your wages on a regular basis. As a retiree, however, there is no similar “automatic” withholding. If you want to have a portion of your income withheld from your retirement plan payments, you will need to set that up with your plan holder. You can also make quarterly tax payments if you can estimate how much your taxes will be for the year.
Failure to set up some type of withholding or payment plan throughout the year could cause problems at tax time. You must pay the IRS on a regular basis, and while you were working, you likely did this without realizing it. If you do not pay as much as you should or if the payments are considered late, then you could face tax penalties that could significantly alter your financial outlook in retirement.
As you reach retirement age, there are certain benefits that you can take advantage of. Sixty-five is the magic number for many tax benefits. The following are examples of these benefits:
· An increased standard deduction
· Decreased percentage requirements for medical payments to be deducted
· Incentives to continue contributing to an IRA, even for spouses
Making the transition from working adult to a retiree can be liberating, but it can also be a financial challenge. Working with an experienced financial planner is a great way to ensure that your retirement funds will work hard for you while you enjoy life.
Don’t let taxes bring down your retirement goals. Be sure that your retirement plan addresses any potential tax costs that may dampen your overall available funds. The best way to do this is to bring your retirement plan to a tax professional who can tell you what income will be taxed and if there is another way to avoid it. The experts at Kaufmann Advisors can be a great help. We can also make suggestions on how you can adjust your plan before the big day. Click our profile below to find out more about us or use the Contact button to get started.
