It is essential for you as a retiree to know whether or not your retirement income will be subject to taxation, how much of it will be subject to tax, and at what rate so that you may plan your finances appropriately and make sure you don’t spend more than you earn. In this article, different taxable incomes will be examined.
Income from Social Security
In practice, the money you get from Social Security is exempt from taxation. You will only be required to make payments if, in addition to your benefits, you earn other significant income (such as wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return).
Following the Internal Revenue Service (IRS) regulations, you must pay taxes on only 85% of your Social Security income.
You may be required to pay income tax on up to 50% of your benefits if you file a federal tax return as an “individual” and your combined income is between $25,000 and $34,000. If it is more than $34,000, 85% of your benefits may be taxable.•••••••
401(k) and Regular IRA Account Earnings
Because pre-tax money is used to fund 401(k) and regular IRA accounts, withdrawals are subject to taxes. Your tax bracket determines the tax rate you pay. After age 59½, you can typically withdraw your money tax-free and penalty-free. Tax-deferred growth and current income taxation are features of the Traditional IRA. Contributions can be made with pre- or post-tax dollars.
You will be required to pay taxes on the money you put into a Roth IRA or 401(k) plan. Any money you save in the account is tax-free and won’t be taxed again when you remove it because you have already paid your taxes on that income. If a person is in a lower tax bracket, a Roth IRA may be a better choice.
Annuities
You may only be required to pay taxes on a portion of your annuity income. For instance, dividends from an instant annuity often consist of not just the earned interest but also a part of the principal amount. Only the accumulated interest, not the principal, is subject to taxation.
On the other hand, variable annuities necessitate first withdrawing your earnings. You can begin drawing the principal once you have removed all of your investment gains.
Due to the taxable nature of the earnings part, any funds withdrawn from the account will be taxed in full. When you first begin withdrawing from the principal amount, you will no longer be responsible for paying taxes on that money.
Certificates of Deposits
Purchasing a certificate of deposit (CD) can be a good alternative for retirees who want a predetermined amount of money to be readily available in the future without taking on any risk.
Even if you receive your CD interest as cash or reinvest it in a new CD, it’s still considered income by the Internal Revenue Service (IRS). According to the IRS, interest is taxable in the year it is paid.
A 1099-INT statement will usually be mailed to you by the financial institution or credit union that issued the certificate of deposit (CD) if your annual interest earnings exceed $10. Box 1 contains the information you need to determine how much interest you made in the CD during the given year.
Dividends
Long-term capital gains or ordinary income tax rates may apply to dividends you receive from companies you own, depending on whether the payouts are eligible.
Holding your stocks for at least sixty days before the dividends are paid or after the dividends are paid will be considered a qualified dividend. This means you will be taxed at the rate that applies to long-term capital gains, which can sometimes be as low as zero.
Pension
Your pension is taxable on your income tax return under the heading “Salaries and wages.” Pensions are distributed regularly, most frequently once per month. On the other hand, rather than receiving your pension in the form of periodic payments, you have the option of receiving it as a lump sum, which is sometimes referred to as a commuted pension.
Contact Information:
Email: [email protected]
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Bio:
Thomas Sweet has 30 + years as a Financial Planner. Securities (Series 1,7, and 65) and Insurance Licensed. Retirement Planning including the actual planning of where your income will come from as well as a discussion of products to get you there. The market has been volatile since Covid broke out and many people are not comfortable with this. If you are retired we will look at your total income and tax situation. If you are still working we have some more time to plan.
