Planning Taxes For Retirement
Retirees often receive income from a variety of sources
, including Social Security benefits, and distributions from pensions, annuities, IRAs and other retirement plans. Your Social Security benefits may be completely tax-free or at least partially free, depending on your total income.
Figuring out how much of your benefits will be included as taxable money involves some math. For planning purposes, you should have an idea of whether your retirement income will cause some of your Social Security benefits to be taxed.
Your pension or annuity may be fully or partially assessable. If all contributions to the pension were deferred, then your money will be fully taxed.
If you contributed some after-assessment dollars to fund your plan, then you have some cost basis in the plan contract. Part of your distributions will be a tax-free recovery of your cost basis, and the remainder will be chargeable income.
Your plan administrator should calculate the taxable portion of your pension allotment. For planning purposes, you will want to contact your plan administrator to find out what your pension payments will be, and what part of the payments will be considered chargeable income.
Distributions from your employer's 401(k) plan are fully taxable since the contributions excluded from your assessable income. Allotments from Roth 401(k) accounts are treated the same as Roth IRA distributions.
Allotments from your individual retirement account may be fully chargeable, partially taxable, or completely cost-free depending on the type of IRA you have. If you have a deductible Traditional IRA, your distributions will be fully chargeable.
You contributed funds using tax-deductible dollars, and dues are deferred on both the contributions and the earnings until they are withdrawn. If you have any basis in a non-deductible Traditional IRA, your allotments will be partially taxable.
A portion of your distribution represents a return of your non-deductible investment, and that portion is recovered tax-free. Allotments from Roth IRAs are completely free as long as you meet two basic requirements.
Your first Roth IRA contribution was made at least five years prior to any distribution and the funds are distributed after you reach age 59 and a half. Taxpayers must begin withdrawing funds from their 401(k) and Traditional IRA plans once the taxpayer reaches age 70 and a half.
Allotments must start "by April 1 of the year following the year in which you reach age 70 1/2," which is called the required beginning date. Roth IRAs and designated Roth 401(k) accounts are not subject to the minimum required distribution rules.
The minimum amount that must be distributed is your account balance divided by the life expectancy figures published by the IRS in Publication 590. You can use Web-based calculators to estimate your minimum distribution, such as this RMD calculator from accounting publisher CCH.
Plan to withdraw at least the minimum amount required from your IRA and 401(k) accounts. Retirees have more control over their situation, since they can decide how much they need to withdraw from various retirement plans.
Retirees can keep their taxes as low as possible by using these time-tested strategies. Together, your standard deduction or itemized deductions and your personal exemptions represents how much income will be tax-free.
Retirees can coordinate chargeable distributions with their mortgage payments, real estate taxes, and medical expenses. If your standard deduction will exceed your taxable income, consider withdrawing more retirement funds than you need.
By accelerating income when you have a zero or low rates, you'll avoid potentially paying more taxes in a future year. Taxpayers can exclude up to $250,000 in capital gains from selling a main home, or up to $500,000 if married.
Also, interest earned from municipal bonds is exempt from tax. There's a special credit for taxpayers age 65 or older, but qualifying for the credit takes careful planning.
Your adjusted gross salary can fall beneath certain limits. Keeping your assessable distributions to a minimum will push more income to future tax years.
by: Jack Landry
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