Tax season is here, and if you’re nearing retirement age, it’s important to understand how much you’ll be paying in taxes during retirement. Although you may have dreamed of the day when you no longer have to worry about paying Uncle Sam, the truth is that taxes still apply in retirement. But don’t worry, with a solid retirement plan, you can minimize your tax liability and enjoy your golden years.
Here are some taxes to keep in mind:
Pension Income Tax
If you have a pension, you’ll pay taxes on the distributions you take from it. You’re taxed at your federal tax rate when you take the distribution, so timing your distributions to reduce your tax liability can be helpful.
Required Minimum Distribution Tax
When you reach the age of 72, you’re required to start withdrawing from some retirement accounts, which means you also start paying taxes on them. Depending on how much you earn through other accounts, these forced withdrawals can push you into a higher tax bracket.
Social Security Tax
Depending on how much you earn, you may need to pay taxes on your Social Security benefits. The IRS can tax up to 50% of your Social Security income if you have a total gross income of at least $25,000 (or $32,000 for couples). Up to 85% of your Social Security income can be taxed if you earn more.
Traditional Retirement Account Tax
Be prepared to pay taxes on your distributions from traditional IRAs, 401(k)s, 403(b)s, and 457s. Unlike Roth IRAs, the money you deposit in these accounts is not yet taxed. It lowers your taxable income for that year, but it doesn’t eliminate your tax liability.
Although you won’t escape taxes during retirement, a financial professional can help you choose the right types of accounts for your specific situation and minimize what you have to pay. So, start planning now and make the most of your retirement years!
