As you prepare for the Golden Years, take some time to think about how your taxes are going to change. Stepping away from full-time work will reduce your income and make you eligible to withdraw Social Security benefits. In order to avoid high taxes in your retirement, take a look at these strategies to keep your payments low and your spirits high.
Pay Attention to Your Income Combinations
It’s finally time to take advantage of those Social Security benefits! Depending on how much income you (and your spouse if filing jointly) make from outside sources, your SS money could be taxed. The general rule of thumb for taxation: ½ of you SS income + income from other sources = $25,000 or more ($32,000 if filing jointly). Depending on your income combination, between 50% and 85% of your SS could be taxed if you exceed this limit! To keep your tax payments low, avoid withdrawing income from other retirement plans or from earning wages from part time jobs.
Convert Pre-tax Retirement Account into a Roth IRA
Have you been saving money in a pre-tax plan, like an employer-sponsored 401(k)? The money you take out of these accounts are open to income tax, and can hike up your overall tax rate if you take out too much. To avoid having higher income taxes year after year, you can often convert these funds into a Roth IRA account. Now when you withdraw money from your retirement plan, you won’t be subject to income tax. However, it’s important to note that the year you make the conversion you’ll pay tax on the total amount of money you transfer over.
Know When You Have to Make Required Minimum Withdrawals
Once you turn 70 ½ years old, you’ll be required to start taking required minimum distributions from retirement plans (except a Roth IRA). If you don’t take out the minimum amount of money each year, the IRS could fine you at 50% of the amount you should’ve taken out. To avoid hiking your tax payments, stick to withdrawing the minimum amount or adjust other areas of your income to accommodate the increased cash flow from this source. There are many online calculators that can help you calculate your required minimum withdrawals so you can properly prepare for that extra cash flow as you adjust to retired life.
Consider Keeping Your Income Diverse
Being smart about your finances during retirement can sometimes seem like a delicate dance. Too much income from one source could tip you over the edge into high taxation rates that you don’t want to deal with during the Golden Years. If you have several different sources of income, try taking a little bit of money from both your taxable and non-taxable sources. For example, take out the required minimum withdrawals from your retirement account in addition to your SS income and wages earned from a part time job. Your final tax bill with be lower in the end!
With the right know-how and proper planning, you can keep your taxes to a minimum once you retire. Now sit back and relax, you’ve earned a little R&R!