Retirement Taxes Stink
Even though you have paid taxes your entire adult life your attitude about tax payments change when you retire. You suddenly realize that on a fixed income every penny counts. Taxes become more of a worry in retirement than they were during your working years.
While you were working you had cash-flow, you had a paycheck. You may have disagreed and grumbled a bit when real estate or income taxes increased but at least you had money coming in from your paycheck to make the payments. And if you needed to you could put in for overtime hours or adjust your finances somewhere else.
Time To Pay Your Taxes
You’re now retired. You are supposed to be having the time of your life, following your dreams, finding new hobbies. However if you calculated the amount of retirement income available without including the taxation of that retirement income, taxes may dent your retirement plans a bit.
Most of your retirement investments escaped taxation while you were working. Now that you are retired the IRS wants its money. If you invested in a Traditional Individual Retirement Account or 401k profit-sharing plan during your working years that money was considered by the IRS as pre-tax money. This pre-taxed money will be taxed as you make your withdrawals.
Money invested into a Roth Individual Retirement Account will not be taxed. The money you invested in there was post-tax money. Roth IRA money was taxed before it was invested. Keep in mind though that any “earnings” obtained in a Roth IRA will be taxed at withdrawal; those “earnings” were never taxed before.
Tax Rates Vary
You should talk with your tax professional about what tax rates you will paying. Most of your withdrawals should be taxed at your current income tax rate. What’s considered income by the IRS? Withdrawals from your retirement accounts, social security and income received from rental properties are the most common sources of income. Your tax adviser can provide you with additional income sources if need be.
You should not allow the doom of taxes to change your attitude about your retirement. You worked hard throughout your career, now enjoy the fruits of your labor. Taxes will never go away; you just need to be aware of them.