How can you plan?It's time to get smarter about how income taxes may affect your future retirement income. In this article, we're debunking some common misconceptions regarding taxes in retirement so that together with your financial professional, you can begin to implement an effective tax planning retirement strategy that'll help you keep more of what you've worked so hard to save for all these years.
Misconception: I'll be in a lower tax bracket when I retire because I'll have a lot less taxable incomeFact: Being in retirement doesn't necessarily mean you'll find yourself in a lower tax bracket. Banking a good portion of your money in tax-deferred retirement savings accounts over the years, in addition to receiving Social Security benefits, pensions, and other assets, could produce new tax concerns. This means that taxes you deferred over the years, coupled with additional retirement assets, may find you retiring back to your current tax bracket, or possibly higher without proper retirement income planning.
Misconception: I'll have less taxes when I retire because I won't be taking home a paycheckFact: When you're working, you may have many deductions that can contribute towards helping you reduce your taxable income. However, when you retire, deductions such as child care credits, educational credits, mortgage deductions, dependents living at home, etc., may no longer be applicable to your situation. Not having these deductions may leave you with more taxable income than you expected in retirement.
Creating a tax-smart retirement plan income strategy
Nobody enjoys having to pay income taxes. Unfortunately, taxes don't stop when your paycheck ends. And when you begin tapping into your pension, retirement accounts, and even your Social Security - you may be taxed federally as well as at the state level.
The good news is that you can play a significant role in controlling the impact taxes will have on your retirement income by working with a financial professional who can help you create a tax-smart strategy. You might be surprised at how a few financial adjustments may be able to help you lessen your tax liabilities when it comes time to tap into your nest egg.
Disclaimer: This article is meant to provide an overview of common tax misconceptions in retirement, and not in any way to provide tax related or financial advice.