Are You Prepared to Pay Your Taxes in Retirement?


You’ve spent your life, or a good portion of it, preparing for retirement. You’ve educated yourself about Medicare in all its many types, Social Security, and all of your savings plans. But have you thought about taxes?

Retirement will certainly bring about surprises. You’ll spend more in one area than you predicted, and less in another. But Uncle Sam and the state that you call home can bring about the biggest retirement surprises of all.

Here are some important tax topics to remember when you’re working to secure your retirement income:

Tax-Deferred IRAs Don’t Necessarily Mean Tax-Free

If you have a Roth IRA, your contributions have been made after taxes. So when you’re ready to start taking withdrawals for retirement income, you won’t have taxes due. Roth contributions are limited, though, so it’s not likely to be your primary retirement income.

Traditional IRAs are taxed when you withdraw. So not only will you need to plan to pay taxes, you’ll also have to budget carefully to have the right amount of usable income after your taxes are paid. You can wait to take withdrawals, but not for long. Bankrate says you’ll have to begin taking out what you’ve put in once you turn 70 1/2.

Social Security is Taxable

Another surprise for some people is that Social Security benefits are taxable. But for many, this won’t be an issue. If your benefits total $32,000 or less, you’re probably safe from duty. More than that, and you’ll owe Uncle Sam and perhaps the state.

Although you probably can’t avoid paying taxes if you receive more than $32,000, you can make tax time a bit more manageable. Social Security can withhold taxes, the same way taxes were withheld from your work income, according to AARP.


Taxes on Investments Can Vary Greatly

There’s no single tax rate for investments — they can vary a lot. For example, Bankrate says some qualified dividends and capital gains are taxed at a lower rate than income. But if you’ve invested in bonds, the interest will be taxed the same as income. One important difference is municipal bonds, which are usually exempt from taxes.

You’ll need to micro-manage taxable investments, recommends Bankrate. Striking a good balance is critical for helping you dodge a major tax hit.This is also true for investments that don’t generate income.

Life Insurance is Taxable at Different Rates

Life insurance protects loved ones after your death, so tax questions about it might not occur to you at all. If you leave your life insurance untouched for beneficiaries, it should be tax-free for them. But you might not know that you often can dip into your life insurance, up to the amount that you paid in, and receive tax-free retirement income during your lifetime.

Annuities are another type of life insurance, but they have different tax implications from traditional policies. With an annuity, you have designated retirement income that you can receive as a lump sum or a steady stream until your death. Some even provide a life stream plus pay the balance to a beneficiary. Unlike traditional life insurance, annuities come with a tax burden on part, but not all, of the income, according to Bankrate.


Where You Live Makes a Difference

Think warm weather and sunny skies are what draws retirees to the Sunshine State? Not entirely. Florida doesn’t have state income tax, and it’s not the only one. If you live in or relocate to a state without income tax, your burden will be reduced dramatically.

Be aware of hidden costs of living in states without income tax. For example, Florida’s sales tax ranges from 6 to 7.5 percent. In Tennessee, another state without income tax, the general sales tax rate is 5 percent, but local sales tax rates can bump that up to 9.75 percent.

There’s a lot of truth to the old saying that there are two universal debts that must be paid — death and taxes. You can’t control the former. But for taxes, you can control some, and be prepared for the rest.

A financial advisor is one of the best investments of both time and money that you can make for your future. There is so much to learn, and information changes constantly. New Retirement can connect you with the right advisor who can clear away the haze and help you chart a course for a retirement where surprises are the exception and not the rule.

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