When it comes to tax planning for your retirement, there can be some obstacles. Fortunately, you can have access to a tax professional who can answer any retirement tax planning questions and guide you through the process.
This article offers you the information you need to know to plan your financial future and for the stage of your retirement.
401(k) Retirement Plan
If you are or were employed by a company that offers this benefit, it is good to take advantage and agree to be included in this program. This retirement plan offers the advantage of deducting the amount of your contribution from your total salary. That is, if you earn $75,000 in 2022 and contribute $5,000 to your 401(k), your taxable income will be $70,000. Many companies offer to match the amount you contribute up to a certain percentage.
For example, a company may contribute 50% of the first 6% contributed by an employee. So, if your annual salary is $60,000 and you choose to contribute 6% to your 401(k) each year, you will contribute $3,600 and your company will contribute 50% of that, or $1,800. You can choose to contribute more than your salary, but your company`s contribution will be capped at $1,800.
However, when you make withdrawals from your account in retirement, your contributions and investment earnings are generally fully taxable. Taxes will be determined by the tax rate at the time of your withdrawal.
Roth IRA Conversion
If you think you`ll be in a higher tax bracket when you retire, you may be interested in a Roth IRA conversion.
What is a Roth IRA conversion? A Roth IRA conversion involves moving money from a traditional IRA retirement account or 401(k) to a Roth IRA account. Contributions to a 401(k) or traditional IRA are tax deductible and income tax is due upon withdrawal. On the other hand, Roth IRAs do not offer a tax break at the time of contribution, but withdrawals from Roth IRAs are tax free at retirement.
Excess Roth IRA Contributions
The IRS sets limits on how much you can contribute to a Roth IRA each year based on age and adjusted gross income. Due to excess contribution over that limit, you could be subject to a tax penalty. But don`t be frustrated if this happens, as there are several ways to request that the IRS forgive us these types of penalties.
Suppose you find yourself in a lucky moment in your life and you can start withdrawing your pension. Most pension withdrawals are taxable because the contributions are made on a pre-tax basis. To avoid penalties for early withdrawals, be sure to properly fill your date of birth: Pensions such as 401(k), Traditional IRA, or SEP IRA plans have tax penalties.
Remember that there are nine states that do not have state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The remaining three, Illinois, Mississippi and Pennsylvania, do not tax distributions from 401(k) plans, IRAs or pensions. Alabama and Hawaii do not tax pensions, but these states do tax distributions from 401(k) plans and IRAs.
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