It’s easy to think that you’ll be paying less tax in retirement. After all, you’re not working full time anymore and, odds are, your income is less. But hang on – let’s look at the whole picture:
Your investment accounts are taxable: Your brokerage investment accounts create taxable dividends, interest and capital gains each year. And as those accounts grow over time, so does the taxable income.
Your Social Security might be taxed: The IRS has a pesky concept called provisional income where you add up half of your SS benefits, plus all of your other income (including tax-exempt interest). If it is greater than $32,000 for married couples and $25,000 for singles, some of your SS will be taxed. This dollar amount is not indexed for inflation in the tax code, and it catches more and more retirees each year.
You might be in a higher tax bracket at age 70 ½: Many retirees have a golden period between retirement and age 70 ½ when they are in a lower tax bracket. But once the Required Minimum Distributions kick in from your tax-deferred 401ks and IRAs, you can easily get pushed to a higher bracket, where you will stay for your lifetime.
Your tax payments get more complicated: You don’t have an employer to withhold taxes anymore, so now you need to pay quarterly estimates or manage the withholdings of your SS and taxable investment distributions. Otherwise you may be subject to under-withholding penalties.
The good news is that some simple tax planning can meet these challenges. Choosing tax-efficient investments and taking advantage of RMD Qualified Charitable Distribution Rules are two straightforward solutions. Roth conversion strategies and periodic IRA beneficiary reviews also have their place in retirement tax planning.
Your tax solutions don’t have to be complicated to be effective. Just being aware and proactive is key, especially before our current personal tax code expires in 2025.
Financial Planning & Investment Advisory Services are offered through Marsh Wealth Management, LLC, an independent investment advisor registered with the state of Tennessee. Yvonne Marsh is an Investment Advisor Representative of MWM. Marsh Professional Group, LLC is a Tennessee registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov.