Death and taxes. The old saying goes that they’re the only two certainties in life. Both will play a large role in your retirement planning. While you may not be able to control or predict when you will pass away, you can certainly implement a strategy to manage your taxes and reduce your exposure.
Many retirees fail to incorporate taxes into their budget or income strategy. They may feel that because they are no longer earning income, taxes are no longer an issue. Or they may simply assume that much of their income isn’t taxable.
This assumption is usually incorrect. Retirement income is often taxable. If you haven’t accounted for taxes in your budget, you may find yourself in a challenging financial situation. Of course, not all retirement income is taxed the same way. Below are four common sources of retirement income. If you haven’t developed a tax strategy, now may be the time to do so.
Social Security Benefits
Social Security is likely to play a significant role in your retirement income puzzle. You may be surprised to learn that Social Security benefits can be taxable, depending on your income level. Their tax treatment is dependent on something called “combined income,” which is the sum of half your Social Security benefit, nontaxable interest and your adjusted gross income.
If you’re a married couple with combined income of $32,000 to $44,000, up to half of your benefit could be taxable. If your income is above $44,000, you could pay taxes on as much as 85 percent of your benefit. For single filers, combined income from $25,000 to $34,000 could result in taxes on up to 50 percent of your benefit. Your exposure jumps to 85 percent of your benefit if your combined income is more than $34,000.1
You can have your taxes withheld from your Social Security payments. However, that will reduce your benefit amount. It’s important to understand your potential tax liability so you can plan ahead and budget accordingly.
If you’re like many Americans, you probably have some amount of retirement assets in tax-deferred accounts such as an IRA or a 401(k) plan. These accounts are popular because they allow you to defer taxes on your gains as long as your funds stay inside the account.
However, that tax deferral could create issues in retirement. Contributions to traditional IRAs and 401(k) plans are often made with pretax dollars. Taxes on your growth are also deferred. At some point, though, you have to pay taxes on these funds. That time is when you take distributions from the account in retirement.
Distributions from traditional IRAs, 401(k) plans, SEP IRAs and other qualified accounts are treated as ordinary income. If these distributions will make up a significant portion of your income in retirement, you could have sizable tax exposure. Be sure to plan accordingly to minimize your risk.
You also may have savings and investments that aren’t held in an IRA or 401(k). These accounts are usually taxed in a variety of ways. For example, any income generated in the account by dividends or interest may result in tax liability. Also, you could face taxes for any capital gains. A tax or financial professional can help you better understand how your nonqualified accounts impact your tax planning.
Will you receive pension benefits in retirement? If so, consider yourself lucky. Pensions are quickly disappearing from employer benefit options. While a pension may provide you with some income stability in retirement, it can also create some tax liability.
Many pensions are funded with pretax dollars. They also aren’t taxed while the funds accumulate during your career. Much like in a traditional IRA or a 401(k), those untaxed dollars have to face tax exposure at some point. That means your pension payments are likely to be taxable.
Ready to implement your retirement tax strategy? Let’s talk about it. Contact us at Mantz Wealth Management Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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