Many retirees aren't aware of the tax implications of their retirement savings, and don't include taxes in their spending plans.
- Paying estimated income taxes - Unless you worked for yourself, you will probably start the process of making estimated tax payments to the Federal and, if applicable, your state government, for income taxes. Payments are required on April 15, June 15, September 15 and January 15. Generally, you need to ensure that you prepay at least 90% of what you actually will owe in the year you are retired or 100% of the prior year's tax amount.
- No FICA taxes - If you get a pension or take IRA distributions, no FICA (SS and MC) taxes will be owed since pensions are not considered income. No FICA taxes are owed on investment income either.
- Higher standard deduction - If you or your spouse is over 65, you automatically are eligible for a slightly higher standard deduction.
- State Tax on pension income - Be careful if you move to a new state. Some states attempt to collect income taxes on pension money you earned within their borders, even if you no longer live there.
- Mandatory withdrawals - As discussed in our June newsletter, when you reach 70-1/2 years, you will need to begin regular withdrawals from your Traditional IRAs and qualified retirement plans. Income taxes are owed on these withdrawals.
- Early withdrawal penalties - if you retire before reaching age 59-½, you are generally considered early or prematurely retiring and therefore, so are your retirement distributions. Early distributions are usually subject to an additional 10 percent tax.
- Tax on Social Security income - no retiree pays taxes on more than 85 percent of their Social Security benefits, and that percentage can be less.
For more information on tax deferred retirement plans and understanding the tax implications on your retirement, contact us at
206-522-0110 for a consultation.