Many Americans spend their lives carefully planning for their retirement. Many don’t, but that’s another issue entirely. According to the Employee Benefit Research Institute, only 17 percent of workers are very confident in their ability to live comfortably in retirement. That’s not surprising considering a 2018 Retirement Savings survey which found that 42 percent of Americans have less than $10,000 saved.
However, if done right, the hope is that retirees can expect to live out their golden years stress-free and in comfort.
But there is one more thing to consider when it comes to retirement preparations which may unhinge your plans — and that thing is taxes.
When you retire, you leave behind many things—the daily stresses of work, commuting, maybe your old home—but one thing you don’t get to leave behind is a tax bill. In fact, income taxes can be your single largest expense in retirement.
Many older Americans are surprised to learn they might have to pay tax on part of the Social Security income they receive. Whether you have to pay such taxes will depend on how much overall retirement income you and your spouse receive, and whether you file joint or separate tax returns.
There may be another tax shock coming when you reach your 70s, having spent nearly your entire life accumulating money in savings in your 401(k) or IRA. But, when you reach your 70s, as a retiree you may face the dilemma of having to take required minimum distributions or else facing a significant tax penalty.
Tax deferral is often good advice, but too much could come back and bite you in the long run. Here’s the problem: The combination of pension income, Social Security, and forced distributions from 401(k)s and IRAs can potentially put a person back in the same tax bracket they were in when they were working and even, in some cases, a higher one. Every year, as a person moves through their 70s and 80s, the required minimum you are forced to take grows, and that can impact your taxes.
Fortunately, there are some possible strategies to avoid these challenges, so you don’t sink your retirement plans. Insurance products with low-interest rates, Roth conversions, and careful investing are just some avenues to explore with your financial and tax advisors.
Remember that your retirement is not just about investment planning and having the right asset allocation mix alone — it’s also about tax planning.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.