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.