|
|
|||
|
About Us
FREE Email Updates! |
Did You Know: Income taxes can consume Up To 52% of your retirement income if you Aren't careful?
Dear Client, When you retire, your life changes in lots of ways -- and so do your finances! One of the biggest changes is that instead of contributing to tax-favored retirement savings plans that can reduce your taxes, you'll start tapping those savings for income while paying taxes at your ordinary rates and trying to avoid the penalties. Did you know that when you retire, most folks income usually comes from several sources that may all be taxed differently? Some may be taxed heavily and some may be partially or fully tax free. A BIG part of retirement planning is knowing the sources of income you expect in retirement and figuring how much tax you will pay to get at it and then determining what (if anything) you can do about it. You say you are many years away from retirement? Thinking about your future income now can provide the incentive you need to target your savings and help understand how to take advantage of the different ways your retirement accounts are taxed. What if you are already retired or the day is right around the corner? Then knowing where you stand can help you make better spending decisions! YOUR INCOME SOURCES WILL DETERMINE HOW MUCH TAX YOU PAY. You will be shocked to see how much of a difference you can make in your annual tax bill if you just plan ahead and by being tax wise when tapping your retirement accounts. And yes, there really can be a HUGE difference... But first let's take a look at the different sources of income you may have in retirement. Unless you're not part of the Social Security system, Social Security is income you can count on, especially if you're retiring in the next five to ten years. But there is a very real possibility that Social Security will provide a smaller percentage of the money you'll need than it does for people already retired. And if you have average earnings, your Social Security retirement benefits will replace only about 40 percent. The percentage is lower for people in the upper income brackets and higher for people with low incomes. Consider yourself fortunate if you also expect income from an employer-sponsored plan. They are going the way of the dodo bird as more employers switch to 401k plans. A defined benefit pension generally pays a regular stream of monthly income based on the formula included in your (usually large) employers plan documents. Or maybe as a single lump sum depending on the plan. A 401(k) type plan, provides income based on the amount that was invested, the way it was invested, and the return those investments produce during retirement. The Employee Benefit Research Institute (EBRI) reports that people 65 and older receive, on average, 19% of their income from these plans. Investment income, from tax-favored plans, including IRAs and annuities, from taxable accounts, and from other assets, including real estate, account for 16% of retired people's income, according to both Social Security and EBRI. Of course, the more you invest during your working life and the higher the average annual return you realize, the larger the percentage of retirement income your portfolio can provide. What may surprise you most, however, is that the rest of the income that retired people live on comes from continued employment. In fact, according to the EBRI study, 25% of the people had paying jobs. Social Security similarly found that 29% of people who were retired in 2009 were still working. And if you are under age 65 that income can drastically affect your social security check although not technically labeled a tax. So planning ahead can go a long way to keeping your taxes as low as possible in retirement. In order to plan ahead properly, you'll need to understand how your retirement income will be taxed. Based on that, you can choose the right strategies to keep your tax bill as low as possible. Retirees often receive income from a variety of sources, including Social Security benefits, and distributions from pensions, annuities, IRAs and other retirement plans. So let's take a quick look at how income from various retirement plans are taxed, and then look at basic tax strategies that can save you thousands. Will your Social Security income be tax free?Your Social Security benefits may be completely tax-free or partially tax-free, depending on your total income. Figuring out how much of your benefits will be included as taxable income 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. Pension and Annuity Income can be partially taxable.Your pension or annuity may be fully or partially taxable. If all contributions to the pension were tax-deferred, then your distribution will be fully taxable. If you contributed some after-tax 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 taxable income. Publication 575, Pension and Annuity Income, provides comprehensive information about figuring the taxable amount. Pension and annuity income is reported to you using Form 1099-R. Your plan administrator should calculate the taxable portion of your pension distribution. 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 taxable income. 401(k) DistributionsDistributions from your employer's 401(k) plan can be fully taxable or partially taxable depending on if the contributions were excluded from your taxable income. Distributions from Roth 401(k) accounts are treated the same as Roth IRA distributions and can be tax-free! IRA Distributions: IRA's are "Special Assets" Distributions from your IRA may be fully taxable, partially taxable, or completely tax-free depending on the type of IRA you have. If you have a deductible Traditional IRA, your distributions will be fully taxable. You contributed funds using tax-deductible dollars, and tax is deferred on both the contributions and the earnings until they are withdrawn. If you have any "basis" in a non-deductible Traditional IRA, your distributions will be partially taxable. A portion of your distribution represents a return of your non-deductible investment, and that portion is recovered tax-free. Distributions from Roth IRAs are completely tax 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. (For more information, see Are Roth Distributions Taxable? in Publication 590. Required Minimum DistributionsTaxpayers must begin withdrawing funds from their 401(k) and Traditional IRA plans once the taxpayer reaches age 70 and a half. Distributions must start "by April 1 of the year following the year in which you reach age 70½," which is called the required beginning date. Roth IRAs and designated Roth 401(k) accounts are not subject to the minimum required distribution rules. So plan to withdraw at least the minimum amount required from your IRA and 401(k) accounts once you reach age 70½. Unfortunately, retirement accounts are also subject to many different types of taxes and penalties upon death, which is often referred to as the "triple tax syndrome". This is comprised of estate taxes, federal and state income taxes and possible excise taxes which can lead to tax erosion of 79% or more! In 2010, the estate tax rate drops to zero percent; if you die in that year, your heirs would not pay estate taxes, even if you passed on $20 billion! One caveat: Congress ensured that the law sunsets in 2011. That is, on January 1st, 2011, the estate tax rate will return to its pre-Bush levels. Practically speaking, this means the difference between dying on December 31, 2010 and January 1, 2011 can mean 55 percent of your estate if you are person of means! Since the person who saved them owns the retirement accounts, they are included in that person’s taxable estate and therefore are subject to estate taxes beginning again in 2011. Additionally, you must remember that retirement accounts accumulate on a tax-deferred basis, which means you have not paid income taxes on these assets. Thus, upon death these assets are subject to federal and state income taxes. In addition to this, there may also be penalties that are often referred to as excise taxes by the government. Therefore, the so called triple tax syndrome is where you pay estate tax, federal income taxes and state income taxes. There are many taxes that can apply to retirement accounts:
A FEW Tax WISE Strategies For Retirees There is hope! Retirees have more control over their tax situation than the average working American, 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 and avoiding the penalties. Taking full advantage of the standard deduction or itemized deductions and personal exemptions. Together, your standard deduction or itemized deductions and your personal exemptions represents how much income will be tax-free. Retirees can coordinate taxable distributions with their mortgage payments, real estate taxes, and medical expenses. Take money out of your taxable retirement accounts when you have excess deductions. 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 the lowest tax rates, you'll avoid potentially paying more taxes in a future year. Maximize tax-free income. Taxpayers can exclude up to $250,000 in capital gains from selling a main home (up to $500,000 if married). Also, interest earned from municipal bonds is exempt from tax. Defer retirement plan distributions until needed. Keeping your taxable distributions to a minimum will push more income to future tax years. The bottom line. The bottom line is that the income source that will make the most difference to living a comfortable retirement is your own savings and investment portfolio. That includes your tax-deferred, tax-free, and taxable accounts and how you tap into them during retirement. And while being responsible for your own financial security during retirement can sometimes feel like a burden, the upside is that if you do it right, you're the one who benefits! You say you're not a number's kind of person? Then let us do the math for you! We will help you determine the best ways for you reach your retirement goal by using the latest financial planning techniques that can reduce financial risk, lower taxes, and avoid probate. So call today 843-661-0220 to schedule a time to get together and discuss your retirement income plan. Your Financial Planner, Conrad E. Seastrunk, CFP® P.S. Are you the type of person that enjoys being audited? Do you get a rush from jumping through tax loopholes and fudging on tax returns? I'm sorry, I really am, but I didn’t go to school all those years to become someone’s “accomplice”. You will see that I love to point out ways my clients can reduce their taxes, while uncovering little known deductions, credits and techniques that can significantly reduce your tax burden.
|
||
|
|||
