If you have been investing wisely you will likely have various types of assets and resources built up that can sustain your desired quality of life by the time you are ready to retire. Although having plenty of capital accumulated for your retirement is a great thing, you may still be wondering about whether or not you will have to continue dealing with paying taxes once you have started your golden years. Although you are not working to make a living you may still have to pay some taxes and it is important you are aware of what to expect.
Social Security taxes
If you are completely reliant on Social Security benefits to sustain your lifestyle during retirement you will likely not have to pay any taxes on Social Security since your income will probably be too low. On the other hand, if you receive income from other sources then you may end up with some Social Security tax liability. You will want to talk to your tax professional about your particular situation to determine how much Social Security taxes you may be paying during your retirement years.
Unearned income
Part of your retirement planning strategy may include some type of unearned income which comes with specific tax rules with which you must comply. This can include various tax-advantaged retirement accounts as well as other types of passive income such as rental income or capital gains from appreciating assets. Your income level will determine your tax bracket and how much you will have to pay in tax liabilities during retirement, just like while you were working in your career.
How unearned income from your Individual Retirement Accounts (IRAs) is taxed will depend on what type of IRA accounts you have. Distributions from a traditional IRA may be subject to income tax if your income reaches the threshold proscribed in current tax law and in accordance with your income tax bracket. If you have a Roth IRA, since the contributions to a Roth IRA are after-tax funds, the distributions you take during retirement are tax free.
Another form of unearned income that you should consider are capital gains. These are the profits you make after selling an appreciated asset. This type of unearned income will be taxed at the current capital gains tax rates which, since 1921, are treated more favorably than ordinary income tax rates. Over recent years this dynamic has seen considerable criticism for seemingly exacerbating wealth inequality in the U.S.
Earned income
Income that you earn from regular employment, including self-employment, is subject to different tax liabilities than unearned income. Many people will work part-time during retirement to supplement their retirement accounts and investment income. This type of income, referred to as earned income, is not only subject to ordinary income tax but you will also have to pay Social Security and Medicare taxes. However, if your total income is not high enough you will not have to pay any income taxes.
Comprehensive retirement planning
Taxes are just one financial aspect you should be thinking about when making preparations for retirement. You will also need to make sure you are investing in the right way in order to ensure you are able to sustain your desired lifestyle during your golden years. Additionally, having a thorough estate plan is essential to make sure your loved ones are taken care of when you eventually pass away.