When you’re busy working, saving and investing for retirement, taxes during retirement aren’t usually on the top of your list, explains The News Tribune in “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure.” Taxes during your working life are not as complex, as they are during retirement.
For most retired people, the biggest assets are their retirement accounts, whether 401(k)s or IRAs. There are also Social Security benefits, any pensions or annuities and Medicare premiums. These all present tax-related decisions that need to be considered.
Tax deferred retirement savings accounts were introduced in 1974 and 401(k) accounts debuted in 1978. For members of the Baby Boom generation, this was the standard for retirement savings. There are now 10,000 Boomers retiring every day, and almost all of them have a retirement account. However, every withdrawal of an IRA account requires a tax payment (unless it’s a Roth IRA, where taxes are paid when contributions are made).
If you were a disciplined saver and amassed a significant amount of money in your retirement savings but not a lot in non-taxable accounts, you may find yourself in a financially sticky and non-tax savvy situation. This is especially true after age 70 1/2, when Required Minimum Distributions must start from those accounts. Your income will go up and might put you into a higher tax bracket than you expected.
When your retirement account income is combined with Social Security, it can cause the amount of Social Security income subject to taxation to rise. If the total of one-half of Social Security benefits plus other taxable income is more than $34,000 (or $44,000 if you are married filing jointly), you’ll have to pay ordinary income tax on as much as 85% of the Social Security income, instead of 50%. That’s not a fun surprise.
On the other hand, you’ll be making payments on Medicare premiums, which for most people are netted out of their Social Security payments. Higher income earners pay more for Medicare. Think of it as a stealth tax. Therefore, you’ll need to manage your income around the Medicare premium thresholds. You don’t want to see your premiums double from one year to the next.
Unless you run the numbers very closely with an experienced advisor, you may find yourself with a higher tax burden than you expected during retirement. All this planning needs to be done in concert with a professional advisor, who can help you manage your tax liability, maximize your Social Security benefits and make sure that you have enough money to enjoy your retirement. That may include trips around the world or leaving a substantial legacy to your children. Speak with an estate planning attorney about minimizing taxes in concert with your estate plan.
The Petrosewicz Law Firm can assist you with your estate planning needs. Contact us today at (281) 344-9455 or [email protected].
Reference: The News Tribune (Jan. 4, 2019) “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure”
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