You’ve worked hard all your life and you’ve been smart with your money. Now you’re ready to finally call it quits and enjoy the so-called “golden years.” Many people look forward to retirement all their lives. Day after day, week after week you clock in and clock out all with your eye on that glorious final last day. Whether you want to travel, spoil your grand-kids, give your time to charitable causes or just hang out in sunny Florida by the pool all day, you’ve earned the right to enjoy life after your career. However, retirement isn’t all roses and ice cream, especially when it comes to taxes. Even after you are no longer collecting a weekly or monthly paycheck you still have to answer to the taxman every year. So what do you need to know in order to truly be prepared for taxes in retirement?
Plan and Prepare
Even though your income situation has changed, you really need to treat retirement like another chapter in your overall tax life. That means it takes careful planning and strategizing in order to be sure you have enough to take care of yourself and to enjoy the experiences you want to have when you’re done working. Here are some key strategies that can help you keep your tax burdens in check and prevent any nasty tax surprises.
- Managing your retirement account – most people who plan for retirement have a personal retirement account, such as a 401k or an IRA. One key factor is managing your withdrawals correctly. One way to reduce the tax bill of your IRA is to open a Roth IRA, which is funded with after-tax money. That means withdrawals are usually tax-free. While it might cost you some money in taxes when you convert from a traditional IRA to a Roth IRA, moving some of your assets from a traditional to a Roth could save you big in retirement. So consider your withdrawal plan carefully in order to reduce your overall tax burden.
- Use a bucket strategy – there are many different ways and types of accounts to save money and when it comes to retirement, it is often a good idea to have multiple accounts. IRAs are obviously a good resource but there are other types of accounts that could also be helpful, and which could be have a smaller tax burden in retirement. Therefore, if you have multiple so-called savings “buckets” you have a better chance of keeping your taxable income lower when you retire.
- Social Security is not free – although you worked for years faithfully putting money into the Social Security program from every paycheck you received, that money you get back in retirement is not free, especially for those who made a lot of money during their careers. High-income earners are often left with big tax bills in retirement because of the combination of large benefits and high, required minimum distributions. In fact, some couples could end up paying taxes on as much as 85 percent of their Social Security benefits. So be aware of how much of those benefits will be counted against you in taxes.
Plan Now for Future Rewards
You don’t want to spend too much time thinking about taxes in retirement. The key is to know what to expect. By planning for the future and preparing now for your taxes in retirement you should not be left with any unexpected tax bills that you can’t afford to pay. Likewise, you should have enough left over to still enjoy doing all those things you plan on doing when you hang up the work shoes for the last time, even if those plans mainly consist of you laying in the sun by the pool.