Mistake 8: Not Factoring in the Impact of Taxes on Retirement
Once you’re no longer earning a paycheck from which taxes are deducted automatically, it can be easy to forget about all the taxes you still have to pay in retirement, from income tax on retirement revenue to property taxes.
You also want to make sure you’re taking advantage of any ways to cut down your taxes in retirement.
Why This Is a Mistake
Taxes can be a huge factor in retirement. Withdrawals from retirement accounts, such as IRAs and 401ks, are usually subject to full taxation at ordinary income rates. Social Security also can be taxable depending upon your income. Furthermore, these withdrawals are added to any other income you earn.
Pension payments are usually taxable, but some pensions might be exempt from state income taxes.
Annuities are taxable, too. Distributions from non-qualified annuities (purchased outside of an IRA or retirement account) will be taxed to the extent that the money being distributed is not the principal amount you contributed.
A Roth IRA is not subject to taxes if all rules are followed, however, and a Roth 401k can be rolled into a Roth IRA to receive similar treatment.
The bottom line is that retirees must take taxes into account. In some cases, there will be options as to where to take money from, and it is important that tax considerations be taken into account with all such decisions.
