Friday, September 13, 2019

Pension Withholding


A pension plan is a great option for retirees. However, in order to use it as effectively as possible, you’ll have to determine what you want to do about taxes. There are a few different options when it comes to pension taxation, and it’s important to choose the one that’s best for you. 



Withholding

One option that you have is to go ahead and have federal and state taxes withheld from your pension checks. This will reduce the amount of money that you receive each month, but, if you withhold enough, you won’t end up owning anything when tax time rolls around.

Not Withholding

If you’d prefer to see a larger pension check each month, then you can choose not to have any funds withheld from your pension check.

However, in most cases, this will cause you to underpay on your taxes, which may mean that you owe regular taxes in addition to an underpayment penalty from the IRS. Of course, there are ways to avoid the penalty, such as estimating your yearly income, including your pension check, and then setting your own tax withholding to match.

If you do go with this second option, your best bet is to carefully add up any and all sources of income, preferably with the help of a tax professional, and then to subtract any deductions for which you are eligible. From there, you’ll get your taxable income, which will help you to determine your tax bracket, which, in turn, can help you determine an estimated amount to withhold.

Whether you ultimately decide to go with withholding or not, you can always come out on top if you have the right help and guidance. For this reason, it’s always a good idea to have a financial professional advise you as you set up and deal with your pension plan.

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