Retirement may mean the end of work … but it does not mean the end of dealing with the Internal Revenue Service (IRS). Depending on your retirement planning strategy, some of your income may remain taxable in retirement.
Tip #1: Avoid stacked taxes
Distributions from a 401(k) or IRA are generally taxed as ordinary income. The amount of the distribution can also impact the tax you pay on your Social Security benefit. Take out too much from your IRA, pay a larger tax on the Social Security benefit.
Tip #2: Know the law
The Tax Cuts and Jobs Act (TCJA) lowered tax brackets. This can be beneficial to those who are looking to retire. However, it is important to note that the TCJA is set to expire in 2025. This means that unless there is additional legislative action, tax brackets will likely increase in 2025. This could result in a higher tax rate for retirees.
It is also important to know what deductions and credits are available. In certain situations, retirees can get a deduction for medical expenses. In most cases, this only makes financial sense if the expenses are significant. This is mainly since the TCJA increased the standard deduction and it simply takes more to justify itemizing one’s returns. Expenses can add up quickly. Be sure to include costs for hearing aids and other medical devices in addition to actual doctor visits, lab work and prescription expenses.
Tip #3: Plan
Proactively planning out a tax strategy can help you to make the most of your retirement savings and reduce your tax obligations.