Tips for Estimating Taxes in Retirement

If you’re like most people, you’re probably looking forward to retirement. Make sure, however, that you’re not looking forward to it as a time when you won’t have to pay taxes. Unfortunately, contrary to popular belief, you do still have to pay taxes in retirement.

The fact of the matter is that life post-retirement and pre-retirement aren’t all that different, at least not in terms of taxes. Your taxes are still calculated based on your income. Of course, there will be some variations based on the type of income you have, but taxes still exist, no matter what.  

Since you know you will be subjected to taxes in retirement, it’s a good idea to start planning for them now, which you can do with just a little effort on your part.

IRA and 401(k) Withdrawals

Are you planning on living off of withdrawals from your retirement accounts? If so, then you can expect these withdrawals to be taxed as income. How much tax you’ll have to pay will depend on the amount you deducted and how much is counted as income, any deductions you take, and your tax bracket. Bear in mind, however, that these rules do not apply to Roth IRA withdrawals, which are tax-free.

Annuity Distributions

In retirement, many people count on annuity distributions as a source of income. Unfortunately, however, most annuities do have taxation rules attached. Immediate annuities, for example, count the interest portion you receive as taxable income. Fixed variable annuities, on the other hand, tax all withdrawals except withdrawals of your original contributions

Home Sales

In retirement, it is very common for people to sell their homes, making some money to live on in the process. Often, they don’t have to pay taxes on the money they earn. In some cases, though, taxation is required, such as when you earn more than $250,000 (if single) or more than $500,000 (if married).

As you can see, you could have quite a few taxes to think about come retirement time, depending, of course, on the types of income you have. As long as you plan ahead for these taxes- something you can do with the help of a tax professional- they shouldn’t be too hard to navigate, though, and you can get on with enjoying your retirement!