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Do You Have a Plan for These Retirement Tax Challenges?

Filed under: Taxes and Planning, Retirement

If you’re currently preparing for retirement, you’ve likely considered a host of different possible challenges, including market volatility, inflation and health care costs. However, there’s one issue that may present a bigger challenge than you expect. It’s taxes.

You may assume that taxes won’t be an issue after you stop working. After all, you’ll no longer be earning income. However, that assumption would be incorrect. The truth is that you could face tax liability on a wide range of income sources, including qualified plan distributions, investment income and even Social Security.

Many retirees fail to plan for taxes in retirement. The result is that they face a sizable expense that they didn’t include in their budget. That expense reduces their disposable income and limits their ability to live the type of lifestyle they want for themselves.

Fortunately, with a little planning, you can prepare for tax issues in retirement and minimize their impact. Below are three common tax-related challenges that retirees face. If you haven’t planned for these issues, now may be the time to do so.


Distributions from Qualified Retirement Accounts.

Have you used a 401(k) plan or an IRA to save for retirement? If so, you’re not alone. Many Americans use qualified retirement accounts to accumulate assets. Such accounts are popular largely because of their unique tax treatment. Taxes are deferred while funds are in the account.

That doesn’t mean IRAs and 401(k) plans are tax-free, however. On most of these accounts, distributions are considered taxable income. If you’ll rely on income from a 401(k) or traditional IRA, your withdrawals could increase your tax liability.

There are a few steps you can take to manage the cost. One is to carefully manage your income and distributions in a way that keeps you in a lower bracket. A tax or financial professional can help you do this. Another option is to convert some of those funds into a Roth IRA, which allows for tax-free distributions in retirement.


Social Security Benefits

Did you know that Social Security benefits are taxable? The amount of your benefit that’s taxable depends on your income. Individuals with combined income between $25,000 and $34,000 pay taxes on as much as 50 percent of their benefit. Singles with income above that bracket pay taxes on up to 85 percent of the benefit. For married couples, the 50 percent bracket includes income levels between $32,000 and $44,000. After your income exceeds $44,000, up to 85 percent of your benefits could be taxable.1

Combined income is defined as the sum of your adjusted gross income, nontaxable interest and half of your Social Security income. One way to minimize your Social Security tax rate is to manage your taxable gross income from other sources. However, you may simply have to plan ahead and incorporate these taxes into your budget.


No Withholding

If your employer currently withholds your taxes from your paycheck, you may not think about your tax costs very often. That all changes in retirement. You won’t have an employer, so you’ll have to manage your tax payments yourself.

This could be important to remember, because the IRS requires you to make estimated quarterly payments if you expect to owe more than $1,000 on your annual return. If you fail to make the estimated payments, you could be hit with a penalty. Again, a tax or financial professional can help you with these issues.

Ready to develop your retirement plan? Let’s talk about it. Contact us today at Ambrose Financial and Insurance Services. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.




Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

17109 – 2017/10/30