Retiring in 2023? 3 Things to Know About Taxes
Retirement is a big milestone to look forward to. But the transition to retirement can be intimidating. That’s because you’re going from earning money and seeing paychecks hit your bank account every month to potentially earning nothing at all.
It’s a great idea to set up a budget for retirement before you make your workforce exit. That way, you’ll be able to make the most of your new income and will be less likely to go overboard on spending.
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At the same time, it’s a good idea to get a handle on your tax situation. Here are three things to know about taxes if your retirement is right around the corner.
1. You’ll still have to pay taxes
There are a number of dangerous myths out there when it comes to taxes, and one is that retirees don’t have to pay them. That’s just not true. Depending on your personal situation, you may end up with a low-enough income to not have to file a tax return — but that’s a function of your income, not age (meaning, you could be in your 20s, and if your income is low enough, the tax-filing obligation goes away).
2. Withdrawals from savings may be taxable, depending on the type of plan you have
If you’ve been steadily socking money away in an IRA or 401(k) plan, good for you. Ideally, you’ll now be retiring with a nice nest egg to tap. But you may need to pay taxes on the withdrawals you take out of your savings, depending on the type of plan you have.
If your money is sitting in a traditional IRA or 401(k), your withdrawals will be taxable. The amount of tax you’ll pay will hinge on your total income and what tax bracket you fall into. But either way, the IRS will get a piece of your withdrawals. On the other hand, if you have your money in a Roth IRA or 401(k), you get to take withdrawals without paying the IRS a dime.
3. Your Social Security benefits may be taxable as well
Many seniors rely heavily on Social Security as an ongoing income source. Now you may not end up claiming your benefits as soon as you retire, depending on your age and financial situation. But if you do start getting benefits, you should know that they may be taxable, depending on what your total retirement income looks like.
If you’re a low-enough earner, and/or if Social Security is your only income source in retirement, then you’ll generally get out of paying taxes on your benefits. Otherwise, prepare to pay up. You should also know that certain states tax Social Security, so in addition to federal taxes, you might owe taxes at the state level.
Avoid a tax shock
The last thing you want is to have a tax headache on your hands once you retire. Keep these points in mind if you’re gearing up to close out your career within the next 12 months.
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March 17, 2023 at 5:34 am
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