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A Plan to Help Minimize Your Taxes in Retirement

A Plan to Help Minimize Your Taxes in Retirement

Your steady source of income might disappear in retirement, but unfortunately your taxes probably won’t. Did you know that up to 85% of your Social Security benefit could be taxed? And, retirement account distributions are taxed differently than investment income. If you’ll have multiple income sources, you should know how each is taxed so that you can best plan to minimize your taxes in retirement.

Social Security benefits

The federal government only taxes Social Security benefits if your income exceeds $25,000 as a single filer, or $32,000 when married filing jointly. 50% of your benefit is then taxable, and 85% is taxable if your income exceeds $34,000 as a single filer or $44,000 when married filing jointly. Your income is calculated by adding up half of your Social Security benefit and all other taxable income, and some tax-free income like municipal bond interest. The state of California does not impose an additional state tax on Social Security benefits.

Retirement Account Distributions

Distributions from traditional 401(k)s, IRAs, 403(b)s, 457s, and thrift savings plans are taxed as ordinary income, and factor into whether your Social Security benefit will be taxed. This is why if you have a retirement account you should be prepared for RMDs. Required Minimum Distributions from your traditional retirement accounts may push you into a higher tax bracket and or over the limit for Social Security benefit taxes. Unlike distributions from traditional retirement accounts, distributions from Roth accounts are not taxed.

Investments

Just like before retirement, you’ll be taxed on your interest income, dividends, and capital gains. Most interest is taxed as ordinary income, except for government issued bonds. Investments held for under a year are taxed at regular tax rates, but investments held for over a year are taxed a preferential rates, and are not taxed if your income as a couple is under $78,750 or under $39,375 as single filer.

But, some sources of cash flow are not counted as taxable income: If your bank CD matures in the amount of $5,000, only the interest earned is taxed, not the whole $5,000. If you sell your home in retirement and lived there for at least two years, you likely won’t have to pay tax on gains from the sale less than $250,000 for single filers, or $500,000 for those married filing jointly.

Taxes can constitute our largest expense in retirement. That’s why we here at Epstein & White believe tax minimization strategies are an important part of a comprehensive retirement plan, and why we offer a tax minimization guide. If you’re interested in learning how you could minimize taxes on all your sources of income in retirement, click here to schedule a complimentary review.

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