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Tax Planning for Retirement

Retirement signifies a lifetime’s worth of achievement and should be celebrated. Paying taxes in retirement, not so much.

If you’re not working the 9-to-5, what’s even taxed? In your retirement years, you’ll pay taxes on social security income, annuity distributions, capital gains and possibly more. Read on to ensure you’re prepared for your tax liability in retirement — and learn the retirement tax strategies that can save you the most cash.

What Is a Tax-deferred Retirement Plan?

In tax-deferred retirement accounts, such as a 401(k), you postpone paying taxes until you withdraw money from your plan. That means you can contribute money today and get an immediate tax break.

However, you will pay taxes up front on your contributions to an account like a Roth IRA. The benefit is tax-free withdrawals once you’ve reached retirement.

What Will My Tax Rate Be in Retirement?

As you might have guessed: It depends. Your income tax liability is largely contingent upon your total annual income and its sources. Similar to during your working years, the more you earn through social security benefits, pension income and 401(k)s, the higher your tax liability will be.

Your filing status (single, married filing jointly, married filing separately, head of household or qualifying widow/widower with dependent child) also impacts what you’ll owe.

Depending on your total income amount, retirees may also pay tax on a portion of their social security benefits. For individuals, 50% of their social security benefits are taxable if their total income is $25,000 - $34,000. For individuals with incomes higher than $34,000, up to 85% of their social security benefits may be taxable.

How Do I Reduce Tax After Retirement?

There are a few key retirement tax strategies that can help you reduce your financial burden in your golden years. Start with these three retirement tax planning tips.

1. Diversify Your Retirement Income Sources

You’ll want to take advantage of different retirement savings vehicles today to limit your tax liability in the future. If your goal is to have a smaller taxable income in retirement, you’ll want to limit how much you withdraw from taxable sources like a pension.

  • Employer-funded pension and 401(k) plans: These are pretax plans. Your tax responsibility on this retirement income will depend on your total taxable income.
  • Capital gains: This tax applies to your investments, like stocks, mutual funds and bonds. If you’ve had an asset for more than one year, you’ll pay the long-term capital gains tax, which is either 0, 15 or 20%, depending on your total taxable income.
  • Health savings account (HSA): HSA withdrawals are tax-free, so long as you’re using it for qualified medical expenses.
  • Roth IRA: Retirement withdrawals from your Roth IRA plan are also tax-free — you’ve already paid taxes on this income.

2. Know Your Catch-Up Contributions and Bonus Deductions

As you approach retirement age, contribution restrictions ease up a bit. If you’re 50 or older, you can contribute an additional $6,500 to your 401(k) plan and $1,000 more to an IRA.

Taxpaying adults 65 and older receive an additional deduction beyond the standard one. The Internal Revenue Service outlines these deductions:

  • Single: $12,950 standard deduction plus $1,750 additional deduction
  • Married filing jointly or qualified widow(er): $25,900 plus $1,400 per spouse
  • Married filing separately: $12,400 plus $1,400
  • Head of household: $18,650 plus $1,750 

3. Work with a Financial Advisor

Retirement may be a decade or three away, but you can put these strategies into effect today. If the thought of diversifying retirement vehicles and filling out tax worksheets seems daunting, well, you’re not alone. Start planning for your financial future with the help of a Farm Bureau financial advisor.

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