If you ask most Americans, the average age they plan to retire is 62. Most are concerned with having enough money to live comfortably and still being young enough to enjoy their retirement. Although income is a major factor in determining your ability to retire, there are also other things to consider. One of these is taxes. To ensure you aren’t blindsided by Uncle Sam, be sure to check out these five questions you should ask about retirement taxes.
Will My Social Security Benefits Be Taxed?
Possibly. If your provisional income [adjusted gross income (AGI) + non-taxable interest income + 50% of your Social Security benefits] is above the allowable threshold for your filing status, up to 85% of your benefits could be taxable.
Single, head of household (HOH), or qualifying widow(er) and your provisional income is:
- between $25,000 and $34,000, you may have to pay federal income tax on up to 50% of your benefits.
- more than $34,000, up to 85% of your Social Security benefits could be taxable.
Filing a joint return with your spouse and your provisional income is:
- between $32,000 and $44,000, you may have to pay federal income tax on up to 50% of your benefits.
- more than $44,000, up to 85% of your Social Security benefits could be taxable.
Married filing separately and lived apart from your spouse the entire year and your provisional income is:
- between $25,000 and $34,000, you may have to pay federal income tax on up to 50% of your benefits.
- More than $34,000, up to 85% of your Social Security benefits could be taxable.
If you lived with your spouse at any time during the year, but file separately, you’ll have to pay federal income tax on 85% of your benefits regardless of how much provisional income you claim.
Confused? No worries, just head over to IRS.gov and use their handy calculator to determine how much of your Social Security benefits will be taxed.
Are My Roth IRA Withdrawals Tax-Free?
Yes! As long as your account is at least five years old and you’re older than 59 ½, you can withdraw money from your Roth IRA without penalty or taxes. If your account is less than five years old, but you’re over 59 ½, you’ll be subject to taxes but not penalties. There are, however, some instances where you can withdraw earnings from your Roth IRA before age 59 ½ and not be subject to taxes or penalties, as long as the account is over five years old. For example:
- First-time home purchase (up to $10,000)
- Qualified education expenses
- Birth or adoption expenses
- Unreimbursed medical or health insurance expenses
- You become permanently disabled
If you’re younger than 59 ½ and your account is less than five years old, however, you won’t be subject to penalties but will have to pay taxes in these situations.
When Do Required Minimum Distributions Kick In?
Your required minimum distribution (RMD) is the minimum amount you must withdraw from your retirement account each year. Generally, you have to start taking withdrawals from your IRA, SIMPLE IRA, or other retirement plan account, such as a 401(k), when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs, however, do not require minimum withdrawals until after you die.
The date of your first RMD withdrawal, however, can be delayed until April 1 of the year following your 72nd birthday. You must take all subsequent RMD payments no later than December 31 annually. If you delay until April 1, you’ll also need to make an additional payment by December 31 of that year, which could bump you into a higher tax bracket.
Your RMDs are included in your taxable income when filing, minus any part that was previously taxed (basis) or that can be received tax-free. If you fail to take your RMD, the amount not withdrawn is taxed at 50 percent.
Are Life Insurance Proceeds Taxable?
In most cases, no. Generally, life insurance proceeds are not included as income on your return and you don’t have to pay taxes on the amount received. If you receive installment payments instead of a lump sum, however, you could be required to pay taxes on any interest earned if the policy was owned by someone other than your spouse.
Will My Overall Taxes Be Lower in Retirement?
Maybe. There are a lot of different scenarios that could raise or lower your tax liability after you retire. It’s nearly impossible to predict what your taxes may be without knowing your specific situation. Additionally, tax rates can fluctuate and may increase by the time you decide to leave the workforce.
Planning Ahead For Retirement & Taxes
The best way to plan ahead for retirement taxes is to meet with a financial advisor. With their help, you can create a diversified portfolio that will help you meet your long-term retirement goals and maximize your tax savings. It’s also beneficial to work with a tax professional when filing your state and federal returns. At Tax Defense Network, we’ll help you get the tax credits and deductions you are eligible to receive and help you plan for future tax needs. Call 855-476-6920 for a free consultation and quote today!