Preparing for Income Tax in Retirement

You will be required to pay income taxes in your retirement. Any income you receive during that period, including Social Security payments, pension payments and retirement fund withdrawals will be taxed. Thankfully, you can plan ahead for this tax to understand how it will impact you in the future. Here are a few things to consider in order to reduce the impact of this tax.

Retirement Account Taxes

There are a number of different forms of retirement accounts; for tax purposes, it is only important to understand tax deferment. If you have a retirement account that offers tax deferment, you will have to pay your taxes on the savings you have accumulated once you withdraw the funds. You do not pay taxes on the money before it is placed in your account. This type of account is best for an individual in a high tax bracket that can use a tax break.

The second type of account is not tax deferred. You pay taxes on your deposits prior to putting them into your account. Then, you never pay taxes on that money again. This structure offers no benefit to you when you invest the money. As a result, It is best to use this strategy if you are currently in a low income tax bracket, and therefore do not pay much in taxes. You will benefit in the future by not paying taxes in retirement. This is known as the Roth structure.

Social Security Taxes

It may sound strange to pay taxes on money you receive from the government, but you will have to pay taxes on your Social Security. You are required to pay taxes for all monies you receive, including unemployment benefits or disability benefits. The tax rate will generally be fairly low. In most cases, you will only pay a taxes for 50 to 85 percent of your benefits. The amount you pay relies on how much income you have in retirement. If you earn less than $34,000 per year in retirement, you be taxed 50 percent of your benefits. Married tax payers will be taxed on $44,000. If you earn more than this, you will be taxed on 85 percent of your benefits. You can have the taxes withheld from each Social Security check.

Pension Taxes

Many social service pensions are not taxed on the federal level. A portion of this income is typically received tax free, but each state can decide how to tax the remainder of the benefit. This includes pension from the military, civil service or government employment. The amount you pay will depend on your income in retirement. As a result, you should consider your retirement tax rate when you are deciding whether your pension will be enough to provide for your retirement or if you additionally need a private retirement fund.

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