Avoid This Retirement Shocker
Avoid This Retirement Shocker
Retirement advice might seem to be coming at you left and right these days. It can be difficult to separate the truly valuable tips, that will definitely help you, and those that are probably a bit of an exaggeration.
But there’s definitely one thing we can all agree on: You should save as much as you can for retirement. We have yet to meet anyone who lamented that they saved too much money!
As long as you’re saving as much as possible, you’re accomplishing two goals. First, you’re obviously preparing yourself for a more comfortable retirement. But you’re also reaping a nice tax deduction each year, for your retirement plan contributions.
Those tax deductions come with a catch, though. During all of those years that you faithfully saved for retirement, the IRS allowed you to set aside tax-free money in your account. But they are counting upon you paying taxes on that money at some point, via your retirement plan distributions. That money will be taxed as regular income each year. And those who saved the most diligently sometimes find themselves facing a shocking situation. They owe more taxes than they ever imagined they would!
How does this happen? Occasionally, some retirees actually move to a higher tax bracket in retirement. So they not only have more taxable income; it is now taxed at a higher percentage rate.
On top of surprising income taxes, your Social Security benefits could be taxed if you earn above certain income limits. On top of that, income-based Medicare premiums could be a bit higher too.
Now, we’re not saying this to scare you, and we’re certainly not saying it to discourage you from saving! It’s always better to have more income and deal with slightly higher taxes. But at the same time, we don’t want you to underestimate the situation, and receive a shocker in your first year of retirement.
Also, there are ways to plan around this situation. If you suspect that this situation could happen to you, there are steps you can take to reduce your tax burden. Some people choose to switch to a Roth IRA toward the end of their career, to set themselves up for some tax-free income later.
We can help you determine whether you could be affected by surprising income taxes, or other unexpected events in retirement. Then, together we can make a plan to avoid these problems. Give us a call and we’ll sit down together and do the math.
