Do You Have a Handle on Your Retirement Taxes?
By Alan Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
As you look in the rearview mirror of your career does it seem that the objects are actually getting further away? That means you are probably getting closer to retirement. Retirement can be a great thing for a lot of people, but it can also cause a lot of anxiety for those who aren’t sure they will have enough money coming in after they call it a day for the last time. Still, others who have saved up might be worried about how much of their hard-earned income they will have to give to the IRS.
There is some good news. That’s because for many people retirement taxes aren’t as bad as they might think. However there are some important things you need to know, and do, to help ensure that your tax burden when you retire is as low as possible. These are steps that you should be taking no matter what stage of your career you find yourself in, because the best way to prepare for retirement is to start while you’re young.
Better Than Expected
Many people think that they will pay a lot of taxes when they stop working. However, there are several factors that determine your retirement taxes and in fact your taxes might actually be less than you expect. This is important because overestimating your retirement tax rate can play a big role in how you save, and how much you save. Let’s take a closer look at some of the reasons your taxes might be better than you’ve been expecting.
Lower income than expected – usually you will not need as much income to live after you retire as many of your life situations are likely to change. If your income decreases enough you might even be able to retire in a lower tax bracket.
Some retirement income is tax-free – unlike income while you’re working, not all retirement income is taxable. In fact, only income from your pension, wages, rentals or a business, as well as from withdrawals from taxable retirement accounts, is subject to tax.
Tax increases are not likely – although tax rates can change it’s more likely that any changes will mainly affect those who are in a higher tax bracket.
Planning a retirement move – many people decide to move to a different state when they retire. Some retirement-friendly states include Florida, Texas and Nevada, which don’t tax income at all. Therefore, by moving to a more tax-friendly state you could lower your tax bill in retirement.
Plan for Retirement Right
These are just a few of the reasons that you might be overestimating your retirement tax bill. Of course, you will almost assuredly have to pay some taxes on your retirement income, but there are ways you can avoid paying too much. Plus, by understanding and following these factors, you can better prepare for retirement by not saving too much or too little. You can also determine which is better for you: Roth or pre-tax contributions.
Get Help if You Need it
Whatever the case, you should start preparing now. Retirement will come quicker than you think. You can contact us if you need help planning for your financial future. You can also use some of our many financial calculators for retirement savings and planning, which can be found here.