A person's retirement years can be relaxing when they have planned accordingly and amassed enough wealth to keep them comfortable. However, one of the most overlooked aspects of retirement planning often involves taxes and how they will impact individuals' finances during their golden years.
Retirees should first look to the type of retirement account they participated in to determine how their finances will be affected. For example, those who invested in a Roth IRA may not face tax issues during retirement because they paid taxes on the money prior to putting it into the Roth account, and the earnings have been left to grow tax-free. For this reason, withdrawals taken during retirement will not be subject to taxes.
Those who utilized traditional IRAs or 401(k)s, however, will be required to pay taxes each year. This is because workers do not pay income taxes on employer-sponsored plans or deductible IRA contributions, Fox Business reports. Further, distributions will be taxed at a retirees' ordinary income tax rate. Lastly, many retirees safeguard their earnings for as long as possible to keep funds in tax-favored accounts. However, investors with tax-deferred retirement accounts must take required minimum distributions when they turn 70 1/2.
Individuals may also face tax liabilities due to their investment accounts. As the rules relating to capital gains may change in the near future, it can be helpful for investors to closely monitor their portfolios and work with a tax preparer
to determine how many gains or losses will impact their taxes.
Lastly, federal taxes are not the only type that retirees must address, and they should also take state taxes into consideration. The rules relating to taxes vary on the state level, and some areas have more favorable tax advantages than others relating to sales and property taxes. In addition, some locations impose no income taxes at all, which can be more beneficial for seniors with limited assets. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, Tennessee and New Hampshire only tax dividend and interest income. Retirees who are planning to relocate should research their potential location's tax rules to better understand how it will impact their overall savings in the long-term.
Retirement planning is a lifelong process, and factoring in related considerations, such as federal and state liabilities, can help ensure that seniors better prepare their finances.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.
About Liberty Tax Service
Liberty Tax Service is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.
Liberty Tax Service is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.