Retirement has finally arrived. You’re ready to start drawing on your retirement income sources. Enjoy this new phase of your life.
Unfortunately, you haven’t been able to retire from taxes – and your taxes will enter a new phase as well. You don’t have an employer to hold out taxes on your salary anymore. You’re responsible for your own taxes and will be facing new taxes and rules on your retirement income sources – like these.
1. Social Security Taxes – Part of your Social Security benefits may be taxable, depending on your overall income level. Social Security benefits are not taxable for singles with combined incomes below $25,000 and for married couples filing jointly with combined incomes below $32,000. Combined income is defined as adjusted gross income (AGI) plus non-taxable interest earnings plus one-half of Social Security benefits.
At incomes from $25,000 to $32,000 for singles and $32,000 to $44,000 for couples, 50% of benefits are subject to taxation – and at higher incomes, 85% of benefits are taxable. Eric Bronnenkant, CFP, CPA, and Betterment Head of Tax notes that “those thresholds haven’t gone anywhere in a really long time … more and more people are having a greater percentage of their Social Security subject to tax.”
2. Pension Taxes – If you’re fortunate enough to have a defined benefit pension, congratulations! Unfortunately, pension benefits are generally taxable. You’ll receive a 1099 form from your provider at the beginning of each year to verify the tax status of your benefits.
3. Required Minimum Distributions – Eventually, you’ll have to take minimum distributions out of your retirement accounts – and unless they are Roth IRAs or 401(k)s established with post-tax funds, you’ll owe taxes on those funds. In some cases, you may donate part of your distribution to a qualifying charity and avoid taxes on those distributions.
4. Double Distribution – When you turn 70-1/2, you have until April 1 of the following year to take your first required distribution from retirement accounts. In all other years, you have until December 31 to take the distribution – thus, you could potentially take two distributions in the first year (one in April and one in December). This could throw you into a higher tax bracket for that year.
5. Penalties – Required minimum distributions are called “required” for a reason. If you fail to withdraw at least the minimum amount by the deadline, you’ll have to pay a 50% tax penalty of the amount that you failed to withdraw. Failing to pay a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
6. Loss of IRA eligibility – Once you reach 70-1/2, you can’t contribute to traditional IRAs to drop your taxable income – you must start taking out money, not putting it in. However, you can still contribute to a Roth IRA using post-tax dollars. Roth IRAs have no age limits.
7. Sales of Investments – If you sell investments to pay for retirement expenses, the proceeds are subject to either short or long-term capital gains taxes, depending on how long you have held the asset. On the bright side, you can write off any losses on those sales.
As mentioned above, you don’t have an employer holding out taxes on your income anymore. If you make enough to pay federal taxes, you’ll have to make estimated quarterly tax payments to avoid underpayment penalties. If you prefer, you can have the Social Security Administration withhold taxes for you by filling out IRS Form W-4V, Voluntary Withholding Request.
Don’t let the tax changes of retirement sneak up on you. Plan for these changes upfront, and then enjoy the relaxing retirement that you’ve earned.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.