After a life of restless work, retirees deserve a delightful and perfect beginning to another stage of life known as the golden age. However, things must be rehearsed beforehand, especially when it comes to retirement income taxes. So, whether you’re approaching retirement or not, tax planning is one way of setting a good retirement in the future. In tax planning, you must first have the basic knowledge about how your retirement income is being taxed. This will help you identify what financial or lifestyle strategies you will take to keep your tax as low as possible.
The following tips will help you come up with a good plan for your retirement income taxes.
Personal exemptions and standard deductions
Using personal exemptions and standard deductions will lessen the amount of tax to be deducted from your income. Thus, you can direct medical expenses, mortgage or real estate or any taxable distributions using standard deductions.
States with no tax retirement pensions
Consider this option if you’re planning to move after retirement. States like Alabama, Hawaii, Illinois, and Kansas do not take tax state or local pension. This is to attract retirees to the state, to offer them more favorable areas to retire and to keep retired taxpayers’ income already residing in the state.
Tax free income rewards
This will exclude two hundred fifty thousand dollars in capital gains and up to five hundred thousand if you are married from selling your home. There will be a tax exemptions for the interest grossed from municipal bonds.
Furthermore, keep your taxable distributions at a minimum for you to gain more income from taxes in the near future.
Special tax credit
If your age upon retirement is 65 years or beyond, then you can apply for the “Credit for the elderly” program to reduce your taxes. But, certain limits are set depending on your adjusted gross income.
Withdraw your RMD
After your age turned to 70.5, you must get your RMD (Retirement Minimum Distributions) by the first of April. Or else, the amount you didn’t withdraw out of your 401 (k) or IRA will be taxed with a steep fifty percent. Thus, it is necessary for you to be familiar with Mandatory Distributions, which IRA has a required minimum distribution rule.
This strategy is one of the tax-friendly moves if you’re planning for early retirement, and if you have a Roth IRA account. This strategy is the opposite of Social Security benefits that give less amount each month if you start withdrawing your earnings earlier. With Smart Money, your contributions are protected from federal income taxes, not your IRA earnings.
It is best for you to seek help in proper tax planning to get your tax status in order. You can tap someone who has knowledge in this field for a step by step guide and advice. Familiarize your rights and certain rules imposed by the IRA and RMD regarding taxes to avoid any law concerns in the future.