How Do Taxes Change During Retirement?

Retirement is what you’ve been saving for your entire working life!  At this point, you’ve amassed enough to comfortably relax and enjoy your time however you see fit.  Unfortunately, though, many people continue to worry about their finances, even after planning for these pivotal years.  So today, we’ll try to address some of the unexpected expenses and taxes you might encounter, to help quiet any lingering concerns about retirement.


Take Advantage of Low Tax Rates


As we all know, tax rates tend to fluctuate depending on the laws in place at the time.  While there’s little you can do to predict future trends, you can maximize them as they last.  Right now, for example, is a great time to withdraw extra tax-deferred distributions.  Because the rates are lower, you’ll lose less of your 401(k) funds to taxes.  If you contributed to a variety of savings programs (on both a pre-tax and after-tax basis), you can pick and choose where you draw from depending on changes in tax reform.  This is also a historically low point for capital gains taxes, so take advantage of this opportunity to move assets around as needed!


Deal with Social Security Taxes When You Need To


If you’re fortunate enough to delay drawing from Social Security, you can see some serious tax benefits down the road.  For many people, this provides a secure income that you can’t outlive—much like pensions, which are available in increasingly rare quantities.  So, enjoying these benefits at a higher rate can provide freedom in retirement for many people.


As for the taxes, that’s a little more difficult to explain.  They largely depend on your combined income, which factors in your adjusted gross income (AGI), any interest you’ve accrued (even the nontaxable kind), as well as half of your Social Security Benefits.  If you’re below a certain threshold, you may not have to pay any taxes.  These key benchmarks vary state-by-state, consider whether you’re filing single or jointly, and are bound to change over time.  Now, however, it’s set at $25,000 for individual filers to receive their full Social Security benefits (without taxation).  Once you exceed this, you can see taxes on up to half of your benefits. At $44,000 (for joint filers), up to 85 percent of your benefits become subject to state and federal taxes.


Many people consider moving during retirement to states that are kinder to their lessened income, but keep a few things in mind before you pack.  The taxes rates you’re paying at this point are still less than the income taxes you faced while working.  So, you may want to adjust your living expenses instead, wherever possible, to the combined income you’ve set for yourself.


Mitigate Unexpected Windfalls


Having extra money doesn’t sound like a problem, but when you’re trying to minimize tax exposure and make your savings last, it becomes a little more problematic.  This often arises when selling a home to downsize or facing estate taxes associated with a large inheritance.  Still, if your investment portfolio includes a number of stocks, fluctuations in the market could bring about a similar situation. There are so many varying levels of exemptions and recaptures associated with such changes that it’s best to discuss all possible options with a professional financial planner and/or accountant before moving any funds.  They can advise on you the best outcome for your personal situation.

When it comes to retirement, don’t let the unknown aspects of future finances detract from this time you’ve worked so hard to achieve.  Even if you planned and saved exactly as you should, we can’t quite predict the future.  So, it’s important to continue to work with an experienced professional, like our staff at ENSO Accounting, each year to ensure you’re on the right path.  Even in retirement, you should continue to plan for retirement—but that doesn’t mean you can’t enjoy it!