What You Need to Know About Retirement and Your Tax Bill
Many people start saving for retirement, at least in some small way, as soon as they enter the workforce. Even if you are a late starter to the retirement planning process, it’s still an essential and impactful financial journey you’ll take during your life. As you work with your family and your financial planner to shore up your retirement outlook, make sure you have all the facts and insights about how your tax bill will impact your retirement income. Here are the top facts you need to know.
You’ll Still Pay Taxes During Retirement
This fact is the most straightforward and basic one, but it’s important to reiterate. Just because you’re not working anymore does not mean your bank account will be free from taxes. During retirement, you’ll be taxed on the social security you receive, withdrawals from your IRA or 401(k), continued investment income, pensions, and anything else that the government considers income. So, when planning your budget for retirement, it’s essential to recognize that you’ll still be handing over a portion of your of it to the IRS.
Paying Taxes on Savings Now or In Retirement?
Even if you’re decades away from your desired retirement date, you’ll still have decisions to make today that will impact your tax bill. When you set up an employer-sponsored 401(k) retirement savings plan, you may have the option to set up a not tax-deferred plan. The standard plan many choose is one that is tax-deferred, meaning you put money from your paycheck directly into your 401(k) without having it taxed. The income tax under this plan allows you to pay based on what’s left in your paycheck. That means when you are retired and are looking to withdraw, you will owe the government taxes on that money and the earnings on it.
While the standard process allows you to put the maximum amount of dollars into the 401(k) today, it also means that when you withdraw, you’ll be taxed based on your income level in retirement. This level may be higher when you retire because you are in a higher rate tax bracket. To avoid this, some people opt for a non-tax-deferred 401(k) where they pay taxes on income today, so in the future, they only have to pay taxes on the gains and not the original amount.
Tax Law Is Constantly Changing, So You Should Keep Up
In 2017, the U.S. government passed a landmark $1.2 trillion tax bill meant to provide lower taxes for Americans and those saving for retirement. This tax bill was one of the more substantial changes to U.S. tax law in some time, and for forward-looking savers, it meant changing the way they planned for retirement. The new tax law, for example, put a stop to recharacterizations of IRAs, made it harder for small businesses to offer 401(k) plans for employees, and reduced the amount of mortgage debt that can be acquired for first or second homes.
These new implications can be tricky to understand when planning for retirement, so it will be vital to receive financial guidance. If you want to make sure your planning is on track for retirement, Tobin and Collins is here to help. Our tax consultants and financial advisors are ready and able to help you achieve your goals. Contact us today!