Taxes are a part of our lives. For instance, most of us pay tax on the income we earn from employment, self-employment, and/or gains on investments. You may also “owe” Uncle Sam when you make purchases – anything from cars to groceries could result in an increase in what you pay… and it doesn’t stop when you leave the world of employment and enter into retirement.
For instance, the income that you generate from retirement accounts like traditional IRAs (Individual Retirement Accounts) and employer-sponsored plans like 401(k)s could be 100% taxable upon withdrawal. In some cases, retirement income benefits from Social Security could also be taxable to you.
With that in mind, will you have enough net spendable income in retirement after you have given Uncle Sam “his” portion?
If not, there could be a way to reduce or even eliminate this financial burden.
Just How High Could Income Taxes Go?
In the U.S., income taxes have been collected since 1913. In the 108 years since then, the top federal rate has been as low as just 7% and as high as 94%! That’s quite a range – and the rate has been 70% or higher in 49 of those years.
Source: Inside Gov (http://federal-tax-rates.insidegov.com/)
While the JOBS Act that was passed at the end of 2017 reduced income tax rates, they are slated to go back up in 2025 – although it is possible that we could see higher income taxes before then.
That being the case, short of reducing your lifestyle and eating mac and cheese throughout your retirement years, there are some strategies that you could use to help yourself pocket more income in the future, such as:
- Opening / converting to a Roth IRA
- Accessing long-term capital gains from investments
- Keeping your “combined” income low when you collect Social Security
One way to ensure that higher income tax rates won’t have a substantial impact on you is to open and/or convert to a Roth IRA. Unlike traditional IRA accounts, your contributions to a Roth won’t reduce your taxable income in the year(s) when you make deposits. But the growth that takes place in the account – as well as your withdrawals – are tax-free. This is the case regardless of what then-current tax rates are.
Another way to reduce what you owe in taxes during retirement is to access long-term capital gains when possible. This is because the tax that you’ll owe on short-term capital gains (from investments that are held for one year or less) is the same as ordinary income tax rates. But long-term capital gains taxes are less. Depending on your specific tax bracket, these are 0%, 15%, or 20%.
If you’ve started to collect your Social Security retirement benefits, there is a chance that a portion of this income could be taxable, too. This can occur if you have other substantial income in addition to these benefits, such as wages, self-employment compensation, interest, dividends, and/or other taxable income that is reported on your annual tax return.
One of the key factors that determine the taxability of your Social Security benefits is the amount of your “combined” income. This is determined by taking your adjusted gross income and adding it to non-taxable interest and one-half of your Social Security benefits.
Will You Have Enough Income in Retirement?
If you’re concerned about how much retirement income you’ll generate in the future, it can help to talk with a specialist in this area. At Annuity Gator, we specialize in creating retirement income plans – which can help you to focus on more important things in the future, like spending time with friends and loved ones.
Do you still have questions about generating income in retirement?
Feel free to reach out to us via phone or email and set up a time to chat. You can contact us by phone at (888) 440-2468 and via email through our secure contact form. We look forward to assisting you with creating the ideal retirement.