Weekend Reading: Will You Pay Higher Taxes in Retirement?
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend Reading
I know you would love to pay less taxes in retirement, but the reality is, you could actually pay more. This is due to factors such as Social Security and required minimum distributions (RMDs) from tax-deferred investments like IRAs and 401(k)s. The combination of RMDs and Social Security income can result in what’s called the "tax torpedo”, but there are ways to help avoid it.
READ THE ARTICLEHow you’re taxed: Your provisional income dictates retirement taxes. It includes Social Security, ordinary income, capital gains, dividends and non-taxable interest. As such, your tax bracket in retirement differs from your accumulation phase. And further, you can enter the tax torpedo phase when additional income pushes your Social Security into higher tax rates, potentially even reaching over 40 percent!
Be proactive: It’s never been more advantageous to leverage today’s low tax rate environment. You can utilize tax-free vehicles like Roth IRAs, health savings accounts (HSAs), loans and life insurance to withdraw income tax-free in the future. Overall, it’s helpful to implement strategies that help keep your income under the standard deduction and provisional income within the zero percent tax bracket, but this often requires the help of a professional.
You don’t want to step into retirement only to find out you owe Uncle Sam a huge heap of your hard-earned dollars. Take the time to create a strategic tax plan today so you can avoid the tax torpedo tomorrow.