Taxes and Fees That Can Take A Good Portion Of Your Retirement Income
Baby boomers are now retiring more and more. Many of them have had more than 40 years to plan and save up for retirement while having the opportunities of 10 percent compounded yields from the stock exchange and many generations to have their house increase in value. However, due to the increasing lifespan, costs of living, and health expenses, many people see more challenges they will have to through or possibly overcome in retirement.
One of the challenges is handling taxes during retirement. The books detailing these matters are extensive and can be quite complex and monotonous to get through. The consequences of penalties can be quite a hit to your savings as well as they can be up to 50 percent for some issues such as required minimum distributions for any underpayment. If not strategized or managed carefully, taxes can eat up quite a significant portion of your retirement income.
In this article, we go over some expenses to expect, such as required minimum distributions (RMDs), Social Security, income taxes at the state level, account sequencing, and additional expenses in Medicare. Knowledge, planning, and implementing strategies to tackle these topics can mean the difference in saving yourself thousands of dollars in the long run.
RMDs. Avoiding the penalties of not paying on time or correctly will save a lot of money on required minimum distributions. Those that reach the age of 70 and half years will need to take out a specified amount from certain accounts such as 401(k)s, Roth 401(k)s, and other IRAs, according to the Internal Revenue Service.
Each year, the requirement for these withdrawals do tend to change, which you find this by checking the IRS website. However, if your spouse is younger than you by over ten years, there is a specific table for that as well. There is also another specific table for those that have received an IRA as an inheritance.
Figuring out what you need to pay correctly may be a difficult task, but will help you avoid costly penalties. It may be helpful to seek assistance from a financial professional to ensure that things are done correctly.
States taxes. Some states do not have state income taxes. However, a majority of states do. There are currently 40 states in the U.S. that tax withdrawals from IRAs, which also applies to required minimum distributions. There are also 13 states that will tax your social security benefits as well.
Social Security. Unfortunately, many can agree that the Social Security program has an archaic system that needs to be updated to better suit this day and age. For instance, many people that retire may want to have a part-time job to keep busy or help with their expenses while claiming their SS benefits early. However, there are limits on annual earnings. This limit is set for next year at $18,240.
If you bring in more money than the limit, one dollar in your benefits will be deducted for every two dollars you make over the earnings cap. You do end up getting these deductions back, but you are having your money withheld, it is better to delay receiving your benefits. Every year that you delay, you get an 8 percent increase.
Additional Medicare expenses. Medicare has an income-related monthly adjustment amount added to your payments, which is also called IRMAA. This is applied if your MAGI, modified adjusted gross income, is over $85,000 if you are a single filer, or over $170,000 if you are a joint filer.
Married couples that make over the limit can expect at least a minimum of $1,595 a year in surcharges.
Income that is considered in your MAGI would be traditional IRAs and Roth IRAs, rollovers, part-time hustle, sale of a property, and RMDs.
Medicare will formulate your IRMAA based on a 2-year-old tax return. However, many things can happen within that time period to the present moment. If you have experienced a life event that qualifies for a reduction such as the death of a spouse or retirement–something that has to lead to a decrease in income flow–you can reach to Medicare and request that they consider using the calculations with a more recent return.
Account sequencing. A lot of people overlook the fact that it is very important where and when you should start making withdrawals to better suit your wants and needs. For some, it is best to tap into their tax-deferred accounts before their tax-exempt ones. And for others, it’s the exact opposite.
To know what is right for you, you will need to take into account what your tax rates are at the state and federal level, what you have in your retirement portfolio, any other income, and how much money you will need for retirement. Are they focused on money for their retirement or passing it down to the next generation?
Depending on the order, the withdrawals are made from where and when it can save retirees thousands of dollars to use for other things rather than taxes and fees.
