When we think about planning for older years, we mainly focus on a few key things: maximizing our pension plan contributions, investing strategically and figuring out when to apply Social security uses. But according to a recently published Nationwide survey, 42% of current retirees made one major mistake during planning: they did not take into account how taxes would affect their retirement income. And that is a mistake you will want to avoid.
How taxes could ruin your pension
You can assume that as a senior you will be entitled to a multitude of non-taxable income. But this is not necessarily the case at all. In fact, here are a few key sources of income that are absolutely taxable.
Social security benefits
If social security is your only source of income during retirement, your benefits are unlikely to be taxed. But if those benefits provide only a fraction of your total income, then you may not be able to keep them.
Whether your benefits are taxed at the federal level will depend on your temporary income, and this is calculated by taking your non-Social Security income and adding half of your annual benefit. If your total amount is $ 25,000 to $ 34,000 and you are single, you could look at taxes up to 50% of your fees, and over $ 34,000, you may be taxed up to 85% of your fees. If you are married with a temporary income of $ 32,000 to $ 44,000, you could tax up to 50% of your benefits, and above $ 44,000 you can tax up to 85% of your benefits. Plus there are 13 states who now tax social security as well. As such, you cannot assume that you will receive that tax without taxes.
Withdrawal of the pension plan
If you choose to place your retirement savings in a traditional IRA or 401 (k), be prepared to pay taxes on your withdrawals. Furthermore, when you turn 72, you will need to start taking it required minimum distributions, or RMDs, from your retirement plan, and they will be taxable just like the withdrawals you decide to take yourself.
If you prefer to avoid tax on withdrawing your retirement plan, put the money in Roth’s savings plan. Roth IRA and Roth 401 (k) come with a non-taxable withdrawal, and Roth IRAs offer the added benefit of being the only privileged retirement plan that does not impose RMDs at all.
Regular investment income
If you have investments in a traditional brokerage account, that income will also be taxed. For example, if you sell shares at a profit, you will be responsible for it capital gains tax, and if you hold bonds that pay you interest twice a year, you will also be taxed on that interest income.
Bearing in mind that there are things you can do to reduce the tax burden on investments. First keep stock for at least a year and the day before the sale. This way you will run into the category of long-term capital gains, which comes with a lower tax rate than short-term gains. Second, consider investing in municipal bonds. The interest they pay is always exempt from federal taxes, and if you buy bonds issued by your home country, you will avoid both state and local taxes.
Forgetting taxes during your retirement planning could squeeze you financially. Be sure to read not only the taxes you might face, but also the goal of finding ways to minimize them so you can keep most of your retirement income.