Retirement withdrawals should be taken strategically.
You have been planning for retirement for awhile.
Likely you have an IRA, 401(k), 403(b), profit sharing or some combination of tax-deferred retirement plans (i.e., where contributions to the plan are pre-tax and the increase on those funds is deferred until withdrawal).
You even worked a few extra years to maximize your Social Security benefits.
According to a recent The Motley Fool article titled “Will My Retirement Fund Withdrawals Affect My Social Security Benefits?,” the planning continues in retirement.
Your retirement withdrawals could trigger unnecessary taxes.
You are taxed on your adjusted gross income, plus taxable interest, plus your annual Social Security benefit.
How does one calculate adjusted gross income?
Your adjusted gross income is calculated by subtracting certain tax deductions from your income for the year.
Any retirement withdrawals from a tax-deferred retirement plan will be counted as your taxable ordinary income, just as it was when you received a paycheck.
Roth IRAs will be excluded because taxes were paid upfront.
If you do not plan your withdrawals strategically, you could pay a hefty bill.
Single persons with a combined income of more than $25,000 and married couples filing jointly with a combined income of more than $32,000 could have their Social Security benefits taxed up to 50 percent.
For singles with more than $34,000 and married coupled filing jointly with more than $44,000, Social Security will be taxed at 85 percent.
Even though you may owe this much, you may not actually pay this much.
Working with an experienced financial planner and accountant can help you determine how much your retirement withdrawals will impact your financial situation.
Are these taxes avoidable?
If you plan your withdrawals from your retirement accounts carefully, you could reduce the amount of the taxes.
Avoid pulling income from a tax-deferred account if you are nearing a tax-triggering threshold.
Cut down on your expenses or take from a Roth account instead.
If you delaying taking Social Security until you turn 70, this can reduce the your tax exposure now by pushing it to the future.
Taking Social Security before full retirement age will permanently decrease your benefit amount.
If you delay these benefits, you can receive a higher amount later and minimize your withdrawals from your tax-deferred retirement account.
This means you will have a lower adjusted gross income.
Although you may not be able to avoid paying taxes on Social Security, intentionally planning retirement withdrawals can minimize your financial stress.
And we could all use a little less stress these days, yes?
Reference: The Motley Fool (Jan. 17, 2020) “Will My Retirement Fund Withdrawals Affect My Social Security Benefits?”