When planning for retirement, it’s important to be aware of the potential taxes that may apply to your income and assets. Here are some taxes to consider in retirement:
- Income Tax: Retirement income, such as withdrawals from traditional retirement accounts (e.g., 401(k), traditional IRA), pensions, annuities, and Social Security benefits, may be subject to federal and state income taxes. The tax rate will depend on your total income, filing status, and specific tax laws. Note that the taxation of Social Security benefits can vary based on your overall income.
- Capital Gains Tax: If you sell investments, such as stocks, bonds, or real estate, for a profit in retirement, you may be subject to capital gains tax. The tax rate will depend on how long you held the investment (short-term or long-term) and your income level.
- Dividend and Interest Income Tax: Dividends received from stocks and interest earned from bonds, savings accounts, or certificates of deposit (CDs) are generally taxable. The tax rate will depend on the type of dividend or interest income and your overall income level.
- State and Local Taxes: In addition to federal taxes, retirees need to consider state and local taxes. Each state has its own tax laws, which may include income tax, property tax, sales tax, and other levies. Research the tax rules in your specific state of residence.
- Required Minimum Distributions (RMDs): Once you reach age 72 (or 70½ if born before July 1, 1949), you must begin taking required minimum distributions (RMDs) from certain retirement accounts, such as traditional IRAs and 401(k)s. The distributions are subject to income tax, and failing to take the required amount may result in penalties.
- Estate and Inheritance Taxes: Estate and inheritance taxes may apply to your assets upon your passing. The rules and thresholds for these taxes vary by state, so it’s important to understand the specific regulations that apply to your estate. Working with an estate planning attorney can help you navigate these matters.
- Medicare Taxes: If your income exceeds certain thresholds, you may be subject to additional Medicare taxes. The Additional Medicare Tax applies to earned income (wages, self-employment income, etc.) above a certain threshold. The Net Investment Income Tax applies to certain investment income if your modified adjusted gross income exceeds a specific threshold.
- Property Taxes: If you own property, you’ll need to continue paying property taxes in retirement. Property tax rates and assessment methods vary by jurisdiction, so it’s important to understand the local regulations.
It’s worth noting that tax laws can change over time, so it’s important to stay informed and consult with a tax professional or financial advisor who can provide personalized advice based on your specific circumstances. Planning for taxes in retirement can help you manage your expenses effectively and make informed decisions about your retirement income and assets.