The calculation the IRS uses to determine how you pay taxes on retirement income creates a danger zone where taxes can be SIGNIFICANTLY amplified. If you fall into this danger zone, you could pay a MUCH higher tax rate on your retirement income. In today’s video, I’ll talk about how to avoid the pitfall of paying way too much in taxes.
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⚠️I am not an attorney, SSDI advocate, or affiliated with the Social Security Administration or any other entity of the US Federal Government . I am a practicing financial planner, but I’m not YOUR financial planner and since I don’t really know you, I can’t give you advice. So please don’t take this video as specific advice for your specific situation. Consult your own tax, legal and financial advisors. 🙇🙇🙇🙇🙇
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The Retirement Tax Bomb is a scary situation that awaits many retirees. It is a circumstance in which you have accumulated your retirement funds in a pre-tax account like Traditional IRA, 401(k) or 403(b) plan and are forced to pay a higher tax rate on each withdrawal during retirement. This tax bill could have a significant impact on your retirement income.
When you contribute to a pre-tax retirement account, you may not have to pay taxes on that money immediately. Instead, you’ll have to pay the taxes when taking out the money in retirement. This differs from a Roth IRA, where taxes are paid upfront, and withdrawals in retirement are tax-free.
The concept of you paying taxes on your retirement account may not feel like a problem until you start receiving distributions. Because not only will you pay tax at your ordinary income tax rate, but you’ll also be taxed on the full amount, including any interest and investment gains you’ve earned over the years.
Many retirees who have accumulated large amounts of savings in their pre-tax retirement accounts can be pushed into a higher tax bracket once they start to take distributions. During retirement, your tax bill could be compounded by other taxes like Social Security taxes, Medicare premiums, state taxes, and other unexpected expenses. This can lead to a significant drain on your retirement savings.
The good news is, you can avoid a retirement tax bomb if you start planning early. Here are some strategies you may consider:
1. Convert to a Roth IRA: Consider converting a portion of your pre-tax retirement funds to Roth IRA. You will pay taxes on the conversion amount, but qualified withdrawals will be tax-free.
2. Withdraw Early: You can start taking withdrawals from your pre-tax accounts before you reach age 72, the age at which you’re required to withdraw a certain percentage of funds each year. This strategy can reduce the total tax bill you would be likely to incur, and you’ll have more control over your retirement tax bill.
3. Diversify Your Account: Try to diversify your retirement account by investing in after-tax or Roth accounts, where appropriate. Having a mix of taxable, tax-deferred, and tax-free accounts will help you better manage your taxes during retirement.
In conclusion, a retirement tax bomb can be a big problem for retirees. By converting to a Roth IRA, withdrawing early, and diversifying your accounts, you can reduce the impact of this tax bomb on your retirement income. Planning for a retirement tax bomb early can help you better manage your tax responsibilities and enjoy a more comfortable retirement.
This is a great video on how to think about retirement taxes.
I'm retired. Just filed my taxes. Didn't pay a dime. It's not at all like this video explains.
You just need to know the facts.
Thank you, you explained someth8ng I was confused about. Working one more year messed me up, at least I know for sure what my retirement date will be.
So, I have a clarifying question to make things simple. If I want to stay inside the 50% taxable rate of my Social Security, married filing jointly, can I just use the max $44,000 rule, and then add $27,700 (2023 Standard Deduction)? This would allow me to basically earn/withdraw/receive around a total of $71,700 per year and pay no more than 50% tax on my SS, correct?
Work like a dog, pay the man for 35 years, then need to hire a MIT math Phd to keep the tax ponzi scheme from stealing more. Seems wrong
I think this video is for homeless people! What about us who gets pensions, SS, interest, with incomes of 100k plus?
I just hope that Social Security will still be around when I retire, so I can worry about this.
If you have a robust RMD it's all over but the shouting. The system is rigged against you.
Understand those are the current laws for Roth accounts. Politicians can change the laws whenever they want.
Increases in retirement income not only affects income taxes, but many other tax payments. My real estate taxes can be frozen at 65 so long as my income is less than $61k, Medicare premiums are based on income as well. My first letter from Medicare said my premium would be over $500 a month based on my income from 2 years ago. Yes I did form 44 but it says they’re going to verify with IRS. The tax bomb does a lot of collateral damage of the innocent especially if you are a widower.
Cheaper to buy the truck with a loan?
What is the point of taking social security? I could not live on the $1250 in social secuirty if i tried. Even with rental property, by the time i pay taxes and insurance there isnt much left. Guess ill keep my business rocking. Poverty will suck
What do you mean the "bottom" of the 3rd category? If you're in the 3rd category then your other retirement income is enough that a minimum of 85% of your SS income will be taxed. That's the real "tax torpedo"…
Devin – would it be better for Wayne and Lisa to buy the truck with a vehicle loan? That way they don't have to take all of the 40K in a single tax year. That seems easier than doing all of these complicated roth conversions. 40K/5 years is about 8k per year.
So basically, aside from the Roth option, the best policy for making larger purchases during retirement is NOT to simply withdraw big ticket amounts, but to plan ahead and SAVE up for them using surplus retirement distributions on a yearly basis. So if the featured couple's retirement AGI 70K something, then save as much as possible living frugally for a few years to save up for the truck.
Our government and tax system are corrupt and should be dismantled!
Would there be an advantage for a retired couple to simply cohabit, unmarried, if they are both drawing SS and retirement distributions separately? Would there be any greater ability to balance those withdrawals using the individual levers of single recipient limits?
I have no clue how you come up with your numbers
Not to worry. China Joe’s effect on the market has reduced the RMD since our balance has fallen 30%. Let’s go Brandon!
Instead of taking the 40k for a truck all in one year they could possibly split it. Taking 20k in December and the balance in January..
Just retired. Biggest problems are getting all your savings in one place.Oh someone will contact you.(Never). You can download the forms and fax them in.(emailing to find out if they received them). No one responds.
Our income consists of 2X Soc Sec, 2 small pensions, and a small VA disability payment, plus RMD's and Qualified dividends. Dividends are more than 1/2 of our income and taxes at 0%. I hope that never ends.
I think everybody’s being kind of greedy you should be happy to pay the taxes. How do you think we are going to pay for Ukraine and all the foreign aid?
feel one Of the greatest challenges that we first timers face in the ma rket is that we end up losing all we have, making it difficult to find ourselves back to our feet. My biggest advice is to always seek the services of a professional just like I did when I ventured into it for the first time. Big thanks to Jasmine Querida. I now make huge profits by weekly through her services while still learning to stand on my own.
In your Podcast you mentioned a tax software where you could put in "what if" numbers for future income distribution. Could you remind me of what that software is?
I am over 50, I put 7 k of after-tax money into a traditional IRA. Not employer funded, my own money. Am I correct that I will only have to pay tax on the dividend portion of this when I withdraw?
So, it’s safe to assume if I have a military retirement in excess of $45K annually there is no getting around having 85% of my social security taxed? Thanks for the videos and good information. Cheers
But I don't trust the government because there are no guarantees that in the future uncle sam won't get his grubby hands on the roth money
So America is the land where the government screws the working class and rewards the filthy rich with all the breaks so to save them money to make more money to get away with not paying taxes. And wasn t that why people left England to get away from the king's unfair taxation.
All of your examples are for poverty tax bills. Basically, anyone with a decent income is going to pay taxes. You spend so much time on talking about how to avoid paying taxes when you’re retired. Only the destitute can get anything out of your videos.
FUCKING FEDERAL GOVERNMENT
Which these tax rates can change tomorrow.
I couldn't survive on my SSA payments after insurances and minimal living costs. Thank goodness for my pension, which allows me to buy groceries, pay for internet, phone, medical costs, and a few necessary monthly miscellaneous items. Each year, I am taxed 85% of SSA payments. No way can I afford to defer any money. I am at the very low end at that tax bracket. SSA needs to either eliminate taxing SSA payments or change the SSA tax bracket to be fair to low-end recipients.
If you take the 40,000 you should start up a business and figure out how to make it expenses and not pay any tax on it.
Get a job working under the table….screw the government
Devin, the real world now is not always the husband having a higher benefit than the wife. It seems all videos on this subject always put the husband as the higher wage earner. And now we have same sex marriages. It is what it is, so maybe be more generalized by saying a married couple, spouse 1 spouse 2; etc. Take names out. Your videos are very educational and this would make you one step ahead of other like videos. Thank you so much for all your help!
What if ss and a distribution from an annuity from inheritance?
Social Security benefits should never be taxed. The fund was being fed by after tax dollars and taxing benefits adds another tax.
This is why the entire Social Security system is bad. This doesn't even address how much benefits are lowered compared to if a person were to save and invest using that money instead.
Damn government going to have their hands in our pockets till the day we die.
Thanks for validating my plan Devin.
We have Sir Ronald Reagan to thank for imposing taxes on Social Security. Also, the brackets haven’t been adjusted for inflation either.
How are qualified dividends from a taxable brokerage account treated in conjunction with SS if you’re in the 22% tax bracket? Let’s say $50K of SS and $100K of QDI for tax year 2023, MFJ.
Because of my pension I get taxed on 85% of my social security. CPA told me there is nothing I can do….Just pay Uncle Sam….
Nice job Devin!