Even though you’re not working, you can still pay taxes in retirement.

Your spending money probably comes from sources like Social Security, a pension, and withdrawals from your retirement savings accounts. Depending on your household finances, those resources can generate enough income to result in income taxes, so you need to plan ahead.

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The more you pay in taxes, the less you have left over for spending needs. And while taxes are potentially inevitable, you may be able to manage how much you spend on taxes over your lifetime.

By understanding where your tax liability comes from, you can take steps to minimize your taxable income. For example, you might selectively pull from pre-tax or post-tax (Roth) accounts, depending on how high your income is in a given year. You might also consider Roth conversions to smooth out how much tax you pay in retirement, and when.

retirement planning is about making sure you have enough resources to last for the rest of your life. Taxes are a big part of that, so it’s critical to understand what opportunities might be available. There are always pros and cons of pursuing tax strategies, but the first step is to learn what’s possible. Be sure to get individualized, detailed advice from a professional before you decide on anything or take any action.

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Timestamps:
0:00 Yes, You Still Pay Taxes in Retirement
0:14 Why Taxes Matter During Retirement
1:00 What We’ll Cover
1:24 Types of Accounts – Tax-Deferred, Tax-Free, Taxable
2:53 Will You Pay Taxes on Social Security?
3:26 Pension Income is Typically Taxable
3:37 Required Minimum Distributions (RMDs)
4:07 How to Manage Your Retirement Taxes: Choose Accounts
5:14 Roth Conversion Strategy – Smooth Out Taxes
5:46 Tax-Efficient Investing During Retirement
6:12 Wrap-Up

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IMPORTANT:
It’s impossible to cover every detail and topic in a video like this. The only thing that’s certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration….(read more)

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Taxes in Retirement: Planning for Tax Costs

Retirement is a time for relaxation and enjoying the fruits of your labor. However, it’s important to remember that you still have financial responsibilities, including taxes. While many retirees expect to have a lower income in retirement, they may be surprised by the tax bill that comes with it. Planning for tax costs in retirement is an essential part of a sound financial plan.

One of the key sources of income for retirees is Social Security. Depending on your total income, a portion of your Social Security benefits may be subject to federal income tax. This means that you could owe taxes on up to 85% of your benefits. Additionally, if you have other sources of income such as pensions, investments, or part-time work, you may also be subject to state taxes on that income.

Another potential tax burden for retirees comes from retirement account withdrawals. Traditional IRAs and 401(k) plans are tax-deferred, meaning that you didn’t pay taxes on the contributions, and the money grew tax-free until you withdraw it. Once you start taking withdrawals in retirement, these funds are subject to income tax at your regular tax rate. This can create a sizable tax bill, especially if you have a significant amount saved in these accounts.

So, what can you do to plan for tax costs in retirement? The first step is to understand your sources of income and how they will be taxed. Take a close look at your Social Security benefits, pensions, annuities, and investment accounts to determine how much of your income will be subject to taxes.

Next, consider the timing of your retirement account withdrawals. By strategically planning when and how much to withdraw from these accounts, you can minimize your tax burden. For example, you may want to spread out your withdrawals over several years to keep your income in a lower tax bracket.

Additionally, consider the benefits of converting some of your traditional retirement accounts to Roth IRAs. While you will pay taxes on the amount converted, these funds will then grow tax-free, and withdrawals in retirement will not be subject to income tax. This strategy can provide valuable tax diversification and flexibility in retirement.

Lastly, work with a financial advisor or tax professional to create a comprehensive retirement income plan. They can help you navigate the complex tax landscape and identify potential tax-saving opportunities. With careful planning and proactive strategies, you can minimize the impact of taxes on your retirement income and enjoy a more financially secure retirement.

In conclusion, taxes in retirement can be a significant financial burden if not properly planned for. Understanding how your various sources of income will be taxed and implementing strategic tax planning strategies can help minimize your tax bill and maximize your retirement income. By taking the time to plan for tax costs in retirement, you can enjoy a more financially secure and stress-free retirement.