Tax Tips for Retirement

Are you trying to save for retirement? Who isn’t? Today it’s extremely difficult for families and individuals to save for retirement. It’s no secret that companies don’t offer pensions anymore, let alone match a halfway decent percentage to 401K programs, and social security is a joke. However, when considering retirement options, few of us consider taxes. The fact is taxes play an integral part in retirement planning.

When we look at our retirement accounts, we don’t consider having to pay taxes on that amount once we are at the age when we need to begin withdrawing. This goes for any 401K or IRA account. The best approach to this? Currently we all live on after tax dollars to provide ourselves with food, clothing, and shelter. We need to look at our retirement accounts the same way.

In fact, many 401K and IRA accounts work on a pre-tax basis. Meaning if a certain percentage of your paycheck goes into your retirement account each time you get paid, this is usually on a pre-tax basis. So when you are finally ready to withdraw from your retirement accounts, remember that this is now the point when you will need to pay taxes on that money…just like any other form of income.
However, it’s also important to remember that in addition to taking advantage of the pre-tax program at the front end of saving for retirement, most tax contributions to a 401K or IRA program are tax deductible.

On the other hand, a Roth retirement account allows retirees to begin withdrawing from that account on a tax-free basis, in addition to your taxable income, of course. However, money going into a Roth retirement is not tax deductible. Either way, we need to pay taxes on the money invested in retirement accounts, regardless of which you choose.

Finally, if you end up in a situation where you begin withdrawing money from another type of retirement account on a tax-free basis, it is recommended that you get in the habit of writing a check to the IRS on a quarterly or regularly basis as you never want to get hit with their fees or penalties or the legal proceedings that could inevitably follow due to tax evasion. This is no way you should spend your retirement.

Of course we aren’t licensed CPAs nor do we provide tax advice, so it is best to speak to a licensed and experienced financial planner or accountant to help you find the best retirement account that works for you. He or she can help determine how much you should invest, how much you will need (which will obviously depend on where you want to live, if you want to travel, living expenses, etc.), and how much you should withdraw on a yearly basis (the norm is about 3% to 4% of your savings per year, at the average retirement age of 66).

All in all, when working on your retirement planning, don’t forget to figure in taxes. You never want to put your retirement planning off as this will only hurt you in the long run. Be aware of the tax laws and how they affect you and how they could affect your retirement planning.


  
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