Taxes After Retirement: Tips for Keeping More of Your Own Money

When it comes to your retirement planning, saving, investing and plotting how to spend your free time are at the top of the list.

How much you will have to pay in taxes after retirement may be the last thing on your mind. But not taking the time to look at how taxes will affect you could be a mistake, and you could be missing out on a chance to get more from your money.

Taxes for Retirees

Even if you leave the workforce, you will still have some tax obligations.  Here are a few things to know about taxes after retirement:

Figuring Out Your Retirement Tax Rate

In retirement, you may have to estimate your tax bracket. Overestimating and underestimating can both cause problems, so it might be a good idea to seek help from a financial advisor or accountant when estimating. It’s important to know that even if you know your tax bracket, you might not know how much you will ultimately end up paying in taxes. Estimating your bracket should at least give you some idea.

First, add up your retirement income and determine at what age you will start receiving distributions from your various retirement savings vehicles. Remember that not all your retirement sources will be taxed the same way. For example, a portion of your retirement income might be taxed at a lower rate until you start receiving higher distributions, or some of your income might not be taxable at all.

It’s also crucial to know your tax bracket for estimating how much you’ll pay in capital gains tax on the sale of any investments subject to the tax.

To calculate your estimated tax payments, you can use the worksheet with Form 1040 ES.  Estimated tax payments are due each year on April 15th, June 15th, September 15th, and January 15th of the following year.

Most Retirees Will Continue to File Taxes with a 1040

Most people file their taxes by using Form 1040.  For most retirees, this will stay the same after you retire.  The main difference is that you attach Form SSA-1099 to report Social Security benefits. And, if you have a pension, you will use Form 1099-R.

You will also need to report work income, annuities and savings withdrawals.

Understand the Tax Rules for Collecting Social Security and Working at the Same Time

Working as long as possible is a tried and true way to give you are more secure retirement.  However, there are definite tax implications for collecting Social Security and working at the same time.

  • If you have reached your “full retirement age,” then you keep all of your Social Security benefits — no matter how much you earn.
  • If you are younger than your full retirement age and earn more than certain amounts, then your Social Security benefits will be reduced.

You can learn more from the Social Security Administration, “How Work Affects Your Benefits.”

Pay Quarterly to Stay on Top of Taxes After Retirement

When you work, taxes are typically withdrawn from every paycheck.  These withdrawals help ensure that you do not owe too much or too little in April.

You can request similar withholdings for your pension, Social Security, annuity and other retirement income sources using forms W-4, W-4P and W-4V.

However, if you are not doing automatic withholdings on taxable income, you will probably need to make quarterly tax payments.

The IRS has a very detailed publication that outlines Tax Withholding and Estimated Tax.   Or use Form 1040-ES to estimate your payments.

Your Retirement Savings and Taxes

When you finally leave the workforce for good, you may start relying on your savings for your income. Depending on what kind of savings or investment accounts you have, your tax obligations may vary.

  • If you’ve invested in an Individual Retirement Account (IRA), your savings are tax deferred, but you will have to pay once you start taking distributions — when you withdraw the money.
  • If you have money in a Roth IRA, then you paid taxes when you invested the money and all withdrawals are tax free.

Strategize for a Roth IRA

It can be a bit of a game to figure out how to save the most money on taxes with regards to IRAs, 401ks and Roth IRAs.

There is which account to save in to begin with.

You can convert money from one type of account to another.

You can time withdrawals from different types of accounts to minimize taxes.

These examples, might help you figure out the best strategies for you.  Although it may be best to work directly with a tax accountant to figure out what is best for you.

  • If you’ve put savings into a Roth IRA, your money is tax-free. You can even convert savings from a regular IRA into a Roth IRA, but you may want to strategize on when to make this move.  For example, The New York Times writes. “Taxes will be due on the amount converted, which is why this is best done when you’re in a lower tax bracket, perhaps before turning to Social Security.”
  • Since withdrawals from traditional IRAs and 401ks are taxable, you might want to limit withdrawals from these accounts — when possible.
  • Try to diversify your withdrawals.  If you have different kinds of accounts, you might be able to withdraw some from both the taxable and non taxable sources. This strategy may help you keep your tax bill low.

Taxes After Retirement: Plan for Required Minimum Distributions

According to the IRS, a required minimum distribution is the minimum amount you must withdraw from your tax advantaged savings accounts each year.

You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or other retirement plan account when you reach age 70 1/2.  Roth IRAs do not require withdrawals until after the death of the owner.

You must also make minimum withdrawals from your 401k by age 70 1/2 or when you retire.

If you do not make these withdrawals, the IRS will assess a rather large penalty of 50% of the amount that should have been withdrawn.

The IRS has more information on Required Minimum Distributions (RMDs).

Thinking of Relocating? Consider the Best States to Retire in for Taxes!

Most of the wisdom shared above is most relevant to federal taxes.  However, state taxes can take a big bite out of your retirement nest egg as well.

If you are considering relocating for retirement, you might as well look at states that have the most favorable tax rates for retirees.  These 10 locations are the best states to retire in for taxes.

Taxes Are Critical, But Your Overall Retirement Plan is More Important

Taxes can be a burden, but they are just one of hundreds of expenses we all contend with.

Having a well documented overall retirement plan is probably more important to your overall financial well being than the details of taxes.  The NewRetirement retirement calculator let’s you plan for retirement from now till your forever.  You can set different levels of income, different levels of expenses, you can explore using home equity to help fund retirement and so much more.

This retirement calculator is easy to use and gives you control over hundreds of different levers so you can discover a retirement plan that suits your desired lifestyle and means.

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