Are your clients aware of what retirement income will be taxed and what won’t be? Most people assume their tax bill will go down in retirement. But that’s a dangerous assumption to make.
Bob Carlson, editor of Retirement Watch, explains, “There was a time when older Americans received a lot of tax breaks...[but] Governments at all levels know that older Americans are where the money is...they have no choice” but to impose taxes on them.
As you know, Social Security benefits might be subject to federal income tax, depending on how much income the filer receives. But retirees also have to pay income tax on pensions and withdrawals from tax-deferred investments such as IRAs, 401(k)s, 403(b)s, and tax-deferred annutities. Withdrawals from federal employees’ Thrift Savings Plan are also taxable.
And what about state taxes? That’s more complicated, as some states tax pensions and others don’t. Different annuities are also taxed differently.
The takeaway here is to be sure that both you and your clients don’t just plan for retirement savings, but also for tax efficiency. As Kiplinger editor Sandra Block writes, “One of the biggest mistakes retirees make when calculating their living expenses is forgetting how big a bite state and federal taxes can take out of savings. And how you tap your accounts can make a big difference in what you ultimately pay to Uncle Sam.”
for the full Washington Post article, with several helpful links to more detailed articles about retirement income taxation.