Income In Retirement
All citizens are subject to income tax from the federal government, even those who are retired. Living on a fixed income in retirement can be difficult, so it’s important to plan for how you will be taxed to get an accurate picture of your future.
Here’s what you will need to know about taxable income in retirement.
Social Security Benefits
One thing that many retirees may not realize is that you must pay taxes on your social security benefits. The portion of your social security benefit that is taxable depends on your taxable income; you may need to pay taxes on up to 85% of your benefit amount. The amount of income to reach the highest thresholds is not even that much, and currently it is taxable income of $34,000 (filing single) and $44,000 (filing a joint return).
When you complete your federal tax return, you can use your annual Social Security Benefit Statement to figure out how much of your benefit payment will be taxable. There are a few ways to pay these taxes: Make quarterly estimated tax payments or choose to have them withheld from your benefit payments.
Retirement Savings Plans
The amount of taxes you pay on distributions from your retirement savings accounts depends on the type of plan. Your contributions to traditional IRAs and 401(k)s come from your pre-tax income. So, when taking distributions from these types of accounts, you’ll be taxed at your regular income tax rate.
Below is the current tax rates for 2021:
Roth IRAs and Roth 401(k)s, however, are built up with funds after taxes. This means that distributions from these types of accounts will not be taxed, provided they meet any withdrawal requirements or restrictions.
It’s a good idea to think about the amount of money that you need to withdraw from your retirement accounts. As mentioned above, your combined income is what will determine your income tax rate, so the more you take out of your retirement accounts each year, the more you may owe in taxes.
Controlling your Taxes
I have been told a lot of times that there are two things that are certain death and taxes. While this is true, we have the power to control the amount we pay in taxes! There are three ways an investment account can be taxed: tax deferred, tax free and taxable. Having a balance of these different tax methods will allow you to control how much you pay in taxes (including social security taxes) because you will be pulling from deferent buckets and will have the ability to keep your taxable income low.
Consulting a Professional
Figuring out how to pay your taxes, take distributions and create an income stream during retirement can be confusing. A financial professional can help you navigate the waters of taxes in retirement and help you avoid pitfalls that may leave you in poor financial health. Having a plan means you will be prepared for whatever retirement might throw your way.
If you want to have a discussion and see how WM Wealth Planning can help you schedule time with us here.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes. *