Our last post concerned whether to convert your IRA to a Roth IRA.
This week, we talk about your income taxes in retirement. It’s almost as important to plan for these tax expenses as to plan for your income when you begin this new stage of your life.
Indeed, every factor affecting your retirement plan needs to be identified and taken into account long before you cease working – and that includes the income taxes you will have to pay when you are no longer earning a salary.
While your tax bracket may be lower in retirement than during your working years, not every portion of your post-retirement income will necessarily be taxed at the same rate. For example, funds withdrawn from a non-qualified brokerage account would be taxed at long-term capital gains rates, rather than at regular income tax rates.
Consider the following hypothetical case – Mary plans to retire in 5 years; she expects to have income available from the following sources:
Federal taxation would be as follows:
Of course, there are additional potential sources of income – and potential tax savings.
For example, long-term capital gains can sometimes be wholly or partially offset by long-term capital losses before taxes are calculated.
Some states attract retirees with a no-state-income-tax policy – these are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Moving to one of these states could completely eliminate the need to pay state income taxes. Other states have very low income tax rates, and/or low sales tax and property tax rates. If you are thinking of a move when you retire, these are facets to consider – though ultimately your plan needs to fit all your retirement needs, and these should not be solely financial goals.
Your CPA/financial planner can help you project your estimated tax rates in retirement year-by-year, and assist in planning how to fund your retirement – not merely calculating the amount of income you need annually, but where and when to take that income from.
S/he can guide you through the particulars of every investment you own, what withdrawing from the individual assets would mean for you, and how it could potentially affect your tax liabilities.
In short, s/he will help you plan for your retirement, rather than simply amassing investment and retirement accounts. This planning, in turn, needs to focus on what you want out of your retirement – your goals, your needs, your desires.
Of course it’s important to put those investment and retirement accounts in place and contribute to them regularly. But retirement planning is much more than total dollar amounts – and your financial planner knows both that fact and how to leverage your assets to give you the best possible retirement plan to meet the long-term goals that are uniquely yours.
Because your plans are just that – they are yours. They aren’t anyone else’s plans. Your goals are your own, and each individual’s goals are based on their unique wants, needs, and circumstances.
If you are wondering how to best plan for your own retirement, and would like some counsel and perspective from a seasoned financial planner, please click here to email us directly – we are here to help.
Until next Wednesday –