Maximizing your profits is a great way to ensure that you have enough money for retirement. The more money you make, the more money you should be able to save. Some retirement saving options can provide tax benefits. However, there are some taxes that you’ll want to plan for when you set up your retirement budget.
Social Security Taxes
Funding for Social Security payments comes from payroll taxes. Therefore, many Americans might be surprised to find out that their Social Security payments can get hit with federal income taxes. Many retirees will not have to worry about paying taxes on their Social Security income, but those at higher income levels might see a tax bill. These taxes are based upon income known as “provisional income,” which is made up of half of your Social Security benefits, any tax-exempt interest, and most other things that will make up your adjusted gross income. If you file jointly and make more than $44,000 in provisional income, 85% of your Social Security could be hit with federal income taxes. This does not mean that your tax rate will be 85%, just that 85% of your benefits will get taxed at the marginal rate.
Required Minimum Distributions
If you have a traditional retirement account from your employer or a traditional IRA, your retirement savings might be subject to required minimum distributions, also known as RMDs. This can lead to a hefty tax bill. Because you received a tax deduction when you invested your money, the government wants to access some of the deferred tax revenue. Therefore, the law requires that you start tapping your traditional retirement accounts at age 72. From there, the amount you access each year will likely go up based upon life expectancy tables. The tax form your accountant fills out will add this deferred income to your taxable income and cause your tax bill to go up. One way to avoid this tax is investment through a Roth IRA.
Taxable Investment Taxes
While taxable investment accounts come with some pretty good tax benefits, those who make a decent amount of unearned income will need to pay taxes on their good fortune. Those who are married and filing jointly with a taxable income of less than $80,000 will not have to pay income taxes on qualified dividends or long-term capital gains. Single filers can make half as much before having to pay taxes. However, any Social Security benefits, income from a job, or distributions from a traditional retirement account will cut the amount of unearned income that can avoid taxation.
Traditional Retirement Account Taxes
If you’ve invested in traditional retirement accounts throughout your working life, you’ll owe taxes when you withdraw the money. This income will be subject to regular income taxes. The marginal rate you’ll pay will be equal to the rate you’d pay for income from a job. If you’ve saved up millions over the decades, you might have to pay several thousand each year in federal income taxes.
Estate Taxes
This tax will not hit most people. However, those who have a high net worth will see their estates taxed after they die. The current tax laws as of 2021 exempt the first $11.7 million from federal estate taxes. That amount doubles for married couples. Any amount above this will have a marginal tax rate between 18% and 40%.
Retirement is a great time for you to let loose. However, there can be taxes that will cut into the retirement you might expect. These are five that are fairly common. States can also tax retirement income. Therefore, you’ll want to plan where you’ll best be able to stretch your dollars into your golden years.