Most people assume that their tax burden will dramatically decrease in retirement once they stop receiving a paycheck, but this isn’t always true. A high tax bill is one retirement risk to be aware of and to try and mitigate. We may be experiencing relatively low taxes right now, but a change in leadership in Washington and a growing national debt could change that. Let’s look at 3 reasons why your tax burden could increase in retirement.
Required Minimum Distributions
Distributions from traditional retirement accounts such as IRAs, 401(k)s, 403(b), 457, and thrift savings plans are taxed as ordinary income. This can potentially mean a higher tax burden in retirement. Required Minimum Distributions from your traditional retirement accounts begin at age 72[1] and may force you to withdraw more than you would otherwise every year. The purpose is to draw down your account and tax the funds that have been growing tax-deferred for many years. If you have a substantial amount saved in a tax-deferred retirement account, consider how this could increase your tax burden later on. There are ways to help minimize your taxes in retirement, such as converting part or all of a pre-tax retirement account to a Roth IRA.
Social Security
Up to 85% of your Social Security benefit can be taxed, depending on your income. To figure out if your benefit can be taxed, add up your adjusted gross income, nontaxable interest, and half of your Social Security benefit to get your combined income. If your combined income as an individual is between $25,000 and $34,000 or is between $32,000 and $44,000 as a married couple filing jointly, up to 50% of your benefit may be taxable. And if your combined income as an individual is over $34,000 or over $44,000 as a married couple filing jointly, up to 85% of your benefit may be taxable.[2]
Capital Gains
Do you plan on generating retirement income from your investments? Investments held for more than one year are taxed at favorable rates. Depending on your income, long-term capital gains will be taxed at either a 0%, 15% or 20% rate.[3] However, single filers with modified adjusted gross income over $200,000 and joint filers over $250,000 may owe a 3.8% surtax on net investment income.[4] Keep in mind that gains and dividends taxed at 0% raise your adjusted gross income, which can affect how your Social Security benefit[5] is taxed. This is why a tax planning strategy is important to have in retirement before making major financial moves.
We understand that taxes could be your biggest expense in retirement, and want to work with you to help minimize them. Tax and income planning are important parts of a comprehensive retirement plan, and we won’t forget to make it part of your plan. To start exploring tax minimization strategies in retirement, sign up for a complimentary financial review.
The content presented is for informational purposes only and is not intended as offering financial, tax, or legal advice, and should not be considered a solicitation for the purchase or sale of any security. Some of the informational content presented was prepared and provided by Lone Beacon Media, LLC dba Lone Beacon, while other content presented may be from outside sources believed to be providing accurate information. Regardless of source no representations or warranties as to the completeness or accuracy of any information presented is implied. Lone Beacon Media, LLC is not affiliated with the Advisor, Advisor’s RIA, Broker-Dealer, or any state or SEC registered investment advisory firm. Before making any decisions you should consult a tax or legal professional to discuss your personal situation.Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC.. In addition, other supervised persons of SHP Wealth Management, LLC. are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC. and SHP Financial, LLC. will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.
The content presented is for informational purposes only and is not intended as offering financial, tax, or legal advice, and should not be considered a solicitation for the purchase or sale of any security. Some of the informational content presented was prepared and provided by tMedia, LLC, while other content presented may be from outside sources believed to be providing accurate information. Regardless of source no representations or warranties as to the completeness or accuracy of any information presented is implied. tMedia, LLC is not affiliated with the Advisor, Advisor’s RIA, Broker-Dealer, or any state or SEC registered investment advisory firm. Before making any decisions you should consult a tax or legal professional to discuss your personal situation.Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC.. In addition, other supervised persons of SHP Wealth Management, LLC. are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC. and SHP Financial, LLC. will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.
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