Preparing for Taxes in Retirement

Tuesday, April 5, 2022

I get a lot of questions about what tax rate people will be in when they retire. The answer depends on your total taxable income. For example, if you are married and your taxable income is $50,000 per year, your first $20,550 is taxed at 10%, and the remaining $29,450 is taxed at 12%. Remember, once you’re officially retired and begin taking withdrawals, you’ll need to pay taxes on any gains and your pre-tax or deductible contributions.

It’s also important to bear in mind these accounts have required minimum distributions (RMDs), which is the point in time when you must begin taking money out. At present, RMDs begin at age 72 for a traditional 401(k) or Individual Retirement Agreement (IRA).

Social Security is yet another area where taxes are lurking after you retire. If you have provisional income, you may have to pony up federal income tax on as much as 85% of benefits. To figure your provisional income, begin with your adjusted gross income, and then add 50% of your Social Security benefits and all of your tax-exempt interest. If your income is less than $25,000 for individual filers or $32,000 for joint filers, you won’t have to pay taxes on your Social Security. However, if your income falls between $25,000 and $34,000 for individual filers or $32,000 and $44,000 for joint filers, then as much as 50% of your benefits are subject to taxation.

Finally, if your income is north of $34,000 for individual filers and $44,000 for joint filers, then as much as a whopping 85% of your benefits are considered taxable. Roth IRA distributions typically don’t count toward provisional income when calculating how much of your Social Security benefit is taxed.

There may be some planning techniques you can put into place to help yourself reduce taxes in retirement, but like anything, working with a professional who understands taxes in retirement is helpful.

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Advisory services are offered through Innovative Financial Planners, LLC, an Investment Advisor in the state of Missouri. Insurance products and services are offered through Innovative Insurance Consultants, LLC, an affiliated company.

The information contained in this article have been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.