Don’t Let Your Tax Bill Catch You Off Guard in Retirement – Part #2

Do you know how taxes could affect your retirement income, possibly including your Social Security and 401k & IRA withdrawals? Leah and Roland discuss how to calculate your tax rate and not let your tax burden in retirement catch you off guard .

How Annuity Distributions Tax Can Catch You Off Guard!

Tax rules apply to any anything you receive from an annuity that’s owned within an IRA.  The exact tax rules will depend on whether your annuity was purchased with after-tax dollars.

The tax rules on withdrawals from fixed or variable annuities requires that your earnings be taken out first. So, you’ll be taking out earnings only  if your account is worth more than what you put into to it. So, this is what is taxable. You’ll begin taking out your original contributions after you’ve withdrawn all your earnings. These withdrawals will not be included in your taxable income.

What To Know About Investment Income

You’ll pay taxes on dividends, interest income, or capital gains, just as you did before you retired. These types of investment income are reported on a 1099 tax form each year. And this is sent to you from the financial institution that holds your accounts. The IRS receives a copy as well.

No every source of cash flow from investments is counted as taxable income. You might own a CD that matures in the amount of $10,000. That $10,000 isn’t extra taxable income to be reported on your tax return—only the interest it earned is reported. But the entire $10,000 is available as cash flow you can use to cover expenses.

Gains Upon the Sale of Your Home; What’s Important

You most likely won’t pay taxes on gains from the sale of your home if you’ve lived there for at least two years, unless you have gains in excess of $250,000 if you’re single, or $500,000 if you’re married. The rules get more complex if you rented your home out for a while, so you might want to work with a tax professional to determine if and how you should report any gains.

Don’t Let Calculating Your Tax Rate Catch You Off Guard! 

Don’t let you tax rate catch you off guard in retirement. This will now depend on the total amount of your taxable income and your deductions. List each type of income and how much will be taxable to estimate your tax rate. Add that up, then reduce that number by your expected deductions for the year.