Later in Life Tax Issues
You should know about the tax issues you might face in your later years as this will help you in planning your retirement income wisely. You will not want your hard earned income disappear by paying taxes. So plan your retirement taxes well and enjoy a secured retirement. Know how your retirement income is taxed so that you can save your earnings. After knowing all these you can take up the right strategy to reduce your tax bills.
Retirement income is taxed in various ways. But first you have to know your sources of income. Some of the sources of income are annuities, IRAs, social security benefits, distributions from pensions and retirement plans. Since social security benefits form a big part of your retirement income you should know how it is taxed. The benefits from social security can be either tax-free or partially tax-free as it all depends upon your income.
Again, another component of your retirement income is Pension and Annuity Income. If the contributions for pensions were tax deferred, the distribution will be totally taxable. You can get your pension distribution assessed for the taxable portion by a plan administrator. You can also get to know what the pension payments and the tax on these will be, by contacting the plan administrator. There is also some taxation on 401(k) distributions. The employers’ 401(k) plan distributions are fully taxable as these contributions are excluded from the taxable income. Your income from the individual retirement accounts may also be fully taxed, partially taxed, or even completely tax-free. All these are taxed depending on the IRA account type you have. For example, this income will be fully taxable if you have a deductible Traditional IRA.
Again the income will be partially taxable if you have a non-deductible Traditional IRA. And if you are having Roth IRAs, the income will be completely tax free provided you meet two basic conditions. The conditions are that the funds were distributed after you have reached the age of 59 and a half and your first Roth IRA contribution have been made at least five years prior to any distribution. You can also plan your taxes by taking certain strategies like deferring your retirement plan benefits, taking advantage of standard deductions, and others options.