The Star Democrat
Taxes, retirement and the need
Concerned about how taxes may affect your retirement?
If so, you’re part of a growing cadre of Americans, some of whom are beginning to reassess their finances as a result of the COVID-19 pandemic and the uncertainties it brought about.
In a recent Harris poll conducted in conjunction with Nationwide, 62 percent of those surveyed said they think it is more important now than it was previously for them to develop a strategy to address taxes in retirement.
Actually, it was always important, so it’s good to see that more people are coming to realize they should be proactive in accounting for taxes as they stash away money for what they hope will be their Golden Years.
Sure, we all realize taxes are important. Otherwise we wouldn’t have roads, bridges, a military and all the other services our contributions to the government help pay for.
But that doesn’t mean we enjoy paying taxes – or that we have any interest in paying more than what is necessary.
The trick, of course, is making sure you take steps to ensure you pay what you owe – but not a dollar more. That’s not always easy and lawmakers routinely change the rules and the allowable deductions, making it that much harder.
The good news is, sometimes changes to the tax code benefit you. The bad news is, sometimes they don’t.
That Harris poll showed that 60 percent of Americans, leaning toward the bad news side of things, expect their taxes to go up significantly in the next four years. Also, 62 percent say it’s more important to minimize taxes now than to wait until they reach retirement.
With all that in mind, let’s take a look at a few tax issues retirees, pre-retirees and others need to know about:
Tax-deferred accounts. When you set aside part of your income to contribute to a traditional IRA or 401(k), you can postpone paying taxes on that money. You also can gain interest on those accounts each year without paying taxes. Of course, with tax-deferred accounts, the key word is “deferred.” Eventually, the tax bill comes due. When you retire and start withdrawing money from those accounts, the IRS will want its share. But what if you decide not to withdraw money from your tax-deferred accounts because you have other income that can pay your bills? Once you reach age 72, you have no choice. That’s when required minimum distributions come into effect. The government requires you to withdraw a certain percentage of your money each year so it can claim those taxes.
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