It might be coming up in a year or two, or maybe you’re still 20 years out, but retirement is coming at some point. There’s a lot to plan for when it comes to retirement, and taxes are one of the big ones. That’s the bad news. Just because you retire that doesn’t mean you get to stop paying taxes. That’s why it’s so important to be ready for that time in your life. In fact, sometimes, taxes can be even more confusing in retirement than when you’re working.
Taxes Change in Retirement
So how can you keep things simple? After all, the last thing you want to do is spend your retirement years worrying about taxes. Retirees potentially collect income from several different sources, including Social Security benefits, retirement plan withdrawals, pension payouts, and various other accounts. And instead of having a set amount pulled from their paycheck each month, retirees have to estimate how much income they will have month to month. So here’s what you need to do to keep things as simple as possible.
1. Check Your Withholding – first you need to take a look at the new withholding tables. Predicting the amount you need to have withheld is not an exact science. If you don’t pay enough you could owe the IRS more come tax time. If you withhold too much you get a big refund but miss out on having that money during the year. So check the tables and use Form W-4 to guide you through the process. You want to get this number right.
2. Social Security Benefits – not every one who receives Social security benefits is taxed on them. Others are only taxed on a portion of their benefits. But you should know the formula. If you’re single and your adjusted gross income combined with your non-taxable interest and half of your yearly SS benefits surpass $34,000 (or $44,000 for married joint filers), then you could be taxed on up to 85 percent of your SS benefits. However, you can useW-4V to withhold a flat rate from each check, instead of paying the amount owed every quarter.
3. Retirement Accounts – If you’ve already passed 70½ years of age, then it’s time to start taking the required minimum distributions (RMD) from your 401K, or other retirement account. If you don’t need the money you have a few options. You could actually use all or some of your RMD to pay your estimated quarterly tax payments at the end of the year. Just withhold taxes from the RMD andthe IRS treats it as though you’ve been paying your estimated taxes throughout the entireyear.
4. Pensions – if you’re going to receive a pension payment or an annuity, you can choose to have taxes withheld from that income. You use Form W-4P and simply choose how many allowances you want to claim. It’s simple math: the more allowances you decide to take, the less money that will be withheld.
Get Prepared Now
Taxes in retirement don’t have to drag you down. Plan ahead now and be ready for when that day comes. Follow these strategies and you should be able to enjoy your golden years, instead of battling the taxman till your last days on earth.