It's reasonable to assume that when you're in retirement, you're no longer
working and earning an income, so you shouldn't have to pay taxes.
But unfortunately, that's not how the IRS works. You typically do pay some
kind of taxes in retirement, and that's important because of course,
you've got some fixed income sources, and you might be taking money out
of retirement accounts. But the more you have to pay in taxes,
the less you have left over for spending on everything that's important
to you. So in this video, we're going to give you some information
to help you not get caught by surprise, so that you can budget
for what your taxes might be and strategize your spending. And there are
also some additional side benefits of keeping your taxes low. It is easy
to overdo that, and I don't know that you need to necessarily go
to zero percent taxes because the price of getting there can be quite
high. But knowing a few things can help you take advantage of opportunities
that could potentially help you. So. We're going to go over types of
accounts, and that helps you understand what the tax consequences are,
and then you can choose what to spend, so that you kind of
"dial in" your tax level as they show with those sliders there.
We'll talk about Social Security and pension income, as well as required
minimum distributions. So the different types of accounts you have are going
to affect the taxation when you take money out. In tax deferred accounts,
those are things like your traditional pre tax IRA, maybe a rollover IRA,
a 401K with pre tax money, that money has never been taxed,
and so it will need to be taxed when you take it out
of retirement accounts. So when you're ready to spend it, if you pull
out, let's say $25,000, you can't necessarily spend that whole $25,000,
or you want to know if you can or not,
because you may need to send some of that to the IRS for
tax payments. Then we have tax free accounts. Those are your Roth IRAS,
for example, an HSA[Health Savings Account] if you use the money for qualified
healthcare expenses. These accounts do not generate taxable income when
you take the money out. There are also taxable accounts like your individual
or joint brokerage accounts, those are going to have you paying taxes each
year as you earn the income in those accounts, but you might also
have gains if the things you invest in gain value. If you sell
those investments, you would typically have maybe long term or short term
capital gains, taxes that you have to pay on those gains,
and typically long term capital gains are going to be the most favorable
for you. Social Security might be taxable or it might not.
If it's your only source of income, there's a decent chance that you're
not going to pay tax on Social Security income, but if you have
other sources of income, including withdrawals from pre tax retirement accounts,
you might have to pay taxes. I'm going to include some information in
the description, a link right to a Social Security Administration's website
to help you figure out more about that.
Pension income is typically taxable, so if that's from an employer that
you worked for, they pay you a lifetime income, that's typically taxable.
Then your required minimum distributions are often taxable. The IRS requires
you to take money out of tax deferred accounts, and the idea is
to make sure that that money isn't tax protected indefinitely, so they want
to generate some tax revenue. In most cases, that's going to be in
pre tax accounts, but there are a couple of exceptions, maybe with inherited
accounts, where it's not going to generate tax bill for you,
so How can you manage your tax? There are a couple of strategies.
One is to pull from whichever bucket makes the most sense to pull
money out of. So if you're in a year where you have a
relatively high income, for example, and you want more money out of your
retirement accounts, it might make sense to pull that from a tax free
bucket, like a Roth IRA. That way you're not going to further increase
your tax bill while you're at a higher rate.
You can also look at filling the tax brackets, and that means trying
to pull out just enough to pay taxes that are relatively low rates,
so if you're in a low income year, that's an opportunity to say,
"I'm okay with this tax rate, I'm going to take out a little
bit more money from pre tax accounts and go ahead and pay those
taxes because I think that that will level out the rate at which
I pay." So yes, you are pre paying some taxes, but it can
potentially end up in you paying less overall during your lifetime.
That's similar to what you're doing with a Roth conversion strategy.
With that approach, you convert money instead of actually taking a withdrawal.
You shift it from a pre tax account to an after tax Roth
account, and there are some tricky rules when you do this,
but if done well, it can result in you having
money in tax free accounts, and again, typically, ideally, you're paying
at a relatively low rate so that you can smooth out those taxes
throughout your lifetime. Then there's also the idea of just general tax
efficiency. So, that's trying to minimize turnover and try not to get too
much in short term capital gains in your taxable accounts,
maybe consider asset location, like what types of investments go into taxable
accounts versus tax sheltered accounts and other things like that. So if
you'd like to talk about these types of things and get some ideas
on your retirement, I'd be happy to chat with you.
We can go over all of this and much more... And
please subscribe to this channel. This helps you stay up to date.
It does not cost you anything, and it also helps me out a
tiny bit, so thanks for doing that! And thank you to everybody who
has already subscribed.