When we think of major retirement expenses, we often consider housing, healthcare, and that trip of a lifetime we’ve been dreaming about for years. But, we often fail to consider what could potentially be our biggest expense – taxes. Many of your sources of income in retirement are taxable, so don’t overlook these three unexpected taxes in retirement.
Tax on Your Social Security Benefit
Although you’ve paid into Social Security your entire working life, your benefit could be taxed, depending on your income. To figure out if your benefit can be taxed, add up your adjusted gross income, nontaxable interest, and half of your Social Security benefit to get your combined income. If your combined income as an individual is between $25,000 and $34,000 or is between $32,000 and $44,000 as a married couple filing jointly, up to 50% of your benefit may be taxable. And, if your combined income as an individual is over $34,000 or over $44,000 as a married couple filing jointly, up to 85% of your benefit may be taxable.[1]
RMDs Could Change Your Tax Situation
Starting at age 72, you will most likely be required to take Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts. Distributions from traditional retirement accounts such as IRAs, 401(k)s, 403(b), 457, and Thrift Savings Plans are taxed as ordinary income, so consider how RMDs would impact your tax situation. The amount you must distribute every year is set by the IRS and could be higher than you want to distribute. This could mean an increased tax burden, as well as an end to tax-deferred growth. Age 72 is a birthday milestone that could change your tax situation, so plan ahead for it.
Have You Recently Inherited an IRA or Will You in the Future?
As of 2019, most people who inherit a retirement account from someone other than their spouse must empty the account within 10 years of the original owner’s death. This could mean paying more in tax than you originally anticipated. If you’re planning to pass on a 401(k) or IRA to someone other than your spouse, you should keep this new rule in mind when creating your estate plan. There are tax minimization strategies for those inheriting and passing on retirement accounts.
[1] https://www.ssa.gov/planners/taxes.html
The commentary on this blog reflects the personal opinions, viewpoints, and analyses of BML Wealth Management’s employees providing such comments and should not be regarded as a description of advisory services provided by West Wealth Group, LLC. The views reflected in the commentary are subject to change at any time without notice. Nothing on this blog constitutes investment advice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future returns.
Investment advisory services through West Wealth Group, LLC, an SEC Registered Investment Adviser. BML Wealth Management and West Wealth Group, LLC are affiliated entities. Insurance Services are offered through BML Wealth & Insurance Services, California Insurance License #0M15550.
We do not provide tax or legal advice, all individuals are encouraged to seek guidance from qualified professionals regarding their personal situation. Any references to protection benefits or steady and reliable income streams in this guide refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products.
