You might be heading into retirement with unprecedented tax liabilities unless you undertake careful pre- and postretirement tax planning.

Tax-deferred retirement accounts like 401(k)s and individual retirement accounts that offer you a tax deduction when you're putting money into the accounts could turn into a tax curse later. If you concentrate all retirement savings in tax-deferred accounts, you could be paying income taxes on most of the money you'll be living on.

Social Security benefits also are taxed, under a complicated formula. Based on tax numbers for 2016, a single taxpayer with a combined income (adjusted gross income + nontaxable interest + 1/2 social Security benefits) of more than $25,000, 50% of her Social Security benefits may be taxed. For joint filers, the threshold is $32,000.1

At incomes more than $34,000 for singles and $44,000 for joint filers, 85% of benefits may be taxed. Bottom line: You’ll pay a tax on at least some of your Social Security benefits unless your income is very low.

Ease your future tax burden by planning ahead:

  • Diversify: Before you retire, continue feeding your 401(k) at least up to the level of your employer match. In addition, take advantage of a Roth IRA if you qualify. Once you retire, you want some investments in an after-tax account for tax-free withdrawals
  • Leave a Roth: If your estate plan includes children, leaving them a Roth IRA could be better tax-wise than a traditional IRA. 
  • Set a steady pace: Although spending in retirement won’t be even-keeled, your withdrawal rate should be, to a point. You may take expensive trips or purchase a new car in some years, but keeping withdrawals steady avoids pushing yourself into higher tax brackets with tax-deferred withdrawals during those high expense years. 
  • Take advantage of low tax brackets: For 2016, a single filer with income between $9,276 and $37,650 is in the 15% marginal tax bracket. When his income climbs to between $37,651 and $91,150, he jumps to the 25% marginal tax bracket. ($75,300 and $151,900 for couples filing jointly).2 
  • Protect your tax breaks: Generally, for many retirees the most efficient strategy is to take withdrawals first from taxable accounts, then from tax-deferred IRAs, then from Roth accounts. However, rather than emptying your taxable accounts just to protect all of your IRA, consider generating just enough withdrawals from the IRA to keep your tax rate low.

 Come see us at Sun Federal CU for all your retirement planning needs. Call today at (800) 786-0945.


1 "Benefits Planner: Income Taxes And Your Social Security Benefits" []

2 "IRS Announces 2016 Tax Rates, Standard Deductions, Exemption Amounts And More" [] October 21, 2015

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Simone Zajac Wealth Management Group, 1735 Market Street, Suite C-16, Philadelphia PA 19103

Tax services are not offered through, or supervised by, Capital Analysts or Lincoln Investment. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.

Tax deferred retirement accounts: 1) reduce current federal taxable income, Note: Roth IRA may not reduce; 2) Contributions grow tax deferred until withdrawn; and 3) Withdrawals taxed as ordinary income in the year received. Tax penalties and penalties for early withdrawal may apply if funds are withdrawn prior to age 59 1/2.

Contributions to a Roth IRA are not tax deductible and there is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Roth IRAs are available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

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