For Mark Roberts’ Use: Income tax topics have dominated the news lately, mostly due to the major overhaul Congress just enacted upon our tax structure. So, you might be feeling concerned about how these changes could affect your income taxes in retirement.
While it will take a bit longer for analysts to fully break down the ramifications of the new laws, we do know that certain things will stay the same. Meanwhile, the new tax brackets and rates might affect you, depending upon how much income you earn in retirement, and from what source.
Taxable versus non-taxable income. As you know, you can save pre-tax dollars in a qualified retirement fund now, but you will owe income taxes on the withdrawals you take in retirement.
On the other hand, if you elect to save money in a Roth account, you are contributing post-tax dollars now. The reward is that you enjoy tax-free withdrawals from that account in retirement (assuming you meet the qualifications).
Taxes on overall income. If you do choose the establish a taxable form of income in your retirement years, keep an eye on the tax brackets (in effect until 2025). The bottom tax rate remains at 10 percent, while the top bracket is taxed at 37 percent.
Social Security taxes. So far, nothing has changed on this front. About one-third of retirees pay taxes on their Social Security benefits. This tax applies to those who claimed benefits before full retirement age, and earn over a certain threshold each year (currently $16,920 annually, subject to periodic adjustments).
Accidental taxation. It can be wise to wait as long as possible, before beginning retirement plan withdrawals. But be careful of waiting too long! If you don’t take your first distribution by age 70 ½, you could be subject to a stiff tax penalty of 50 percent of the amount you should have withdrawn. Also, if you wait too long to take that first withdrawal, you might end up taking two during the first year, and bumping yourself into a higher tax bracket.
As you can see, income taxes continue to be complicated even long after you’ve retired. Continue to work closely with us, and we can help you plan around these taxes throughout your retirement years.