Do you want to avoid paying income taxes on your retirement income? Have you heard about a zero-tax bracket? Is it possible to achieve a zero-tax bracket for retirement? Our Michigan retirement planning and estate planning attorneys want to help you maximize your retirement income by lowering the amount of income tax you are required to pay during retirement. For some people, a zero-tax bracket during retirement may be possible. For others, getting as close to a zero-tax bracket during retirement may be the goal.
It is important to prepare now so that you have sufficient income during retirement to continue the standard of living you desire so that you can enjoy your “golden years.” How can we help you achieve that goal? With comprehensive estate planning and retirement planning services.
Sources of Income During Retirement
You can receive income during retirement from a variety of sources. Five of the most common sources of income most people rely upon after retirement are:
- Social Security Income
If you rely solely on Social Security benefits to pay your living expenses during retirement, you probably will not owe income taxes on your benefits. The problem with relying solely on Social Security income is that the monthly amount of income you receive from Social Security may be lower than your after-tax income before retirement. Many people find that they must drastically cut costs just to break even.
Therefore, you need to plan for additional sources of income during retirement. However, increasing your monthly income during retirement may result in income taxes on Social Security income. Careful retirement and estate planning can help reduce taxes on your Social Security income.
Most of the income you receive from pensions is considered taxable income by the IRS because many pensions are funded with pre-tax income. You can have income taxes withheld from your pension check to help avoid a large tax payment when you file your returns. For pensions funded with after-tax income, the pension payments should be tax-free. You could also have situations in which portions of the pension contributions were pre-tax income, and portions of the contributions were after-tax income. If this is the case, only a portion of the pension income will be taxable.
- Investment Income
Most investment income is reported as taxable income. The interest, dividends, and capital gains from investment income are reported to the IRS on a 1099 form each year. While there may be some exceptions, such as the initial deposit into a CD or a zero-tax capital gain, you need to be very careful when planning for retirement using investment income as a primary source of income because you could pay substantial income taxes during retirement if this is your main source of retirement income.
- Individual Retirement Accounts and 401(k) Accounts
IRAs, 401(k) accounts, and other pre-tax retirement accounts are extremely popular as a means of saving for retirement. If you are employed, your employer may match a portion of your contributions to your retirement account to help you save for retirement. Employer contributions are a tremendous incentive for employees to contribute to employer-sponsored retirement accounts. However, most withdrawals from 401(k) accounts, IRAs, 457 plans, and 403(b) plans are considered taxable income during retirement.
The reason this type of retirement income is taxable is that your contributions to these accounts were made with pre-tax dollars. The amount of income tax you will pay depends on several factors, including your other sources of income and your allowable deductions. Roth IRAs can be an exception if the Roth IRA is set up and funded correctly.
- Distributions from Annuities
Some income from annuities may be taxable. If your annuity is owned through an IRA or other retirement account that is taxable, then your annuity payments should follow the same tax rules as the account that owns the annuity.
However, if you purchased your annuity with after-tax dollars, the distributions from the annuity may or may not be taxable. Withdrawals or disbursements on earnings and interest is considered taxable income. However, withdrawing original contributions of after-tax dollars should not be considered taxable income.
Using a Variety of Retirement Accounts to Save for Retirement
An effective means of lowering the amount of taxes you must pay on income during retirement is utilizing a variety of retirement accounts. Deciding how to invest your savings to maximize the amount of retirement income available while minimizing the taxes on retirement income can be complex.
Planning for a zero-tax bracket during retirement is much more complicated than simply choosing where to invest your money for the future. An experienced retirement planning attorney who understands tax law and probate law can help you develop a comprehensive retirement and estate plan that maximizes your income, investments, and assets.
Contact the Retirement Planning Attorneys of The Elder Care Firm of Christopher J. Berry, CELA
For more information about retirement planning and estate planning, call 888-390-4360 or use the contact form on our website. We are here to help you as you plan for your future and your family’s future.