Retirement planning is important. You have future financial needs that you need to secure today. In order to secure your future financially, then retirement planning is a must. One of the most important things to consider when doing retirement planning is to study tax matters.
You might be thinking of continuing to work even after you have retired. Income tax laws of different states vary and so you should know what your state law says about income taxes for working retirees. Some states support their earned income and provide them extra privileges. However, there are also some states that don’t distinguish retiree income and so their income is treated like everyone else’s and taxes are imposed on all earned income. The taxation amount differ between states as well. Transferring to a new state can have tax consequences as well since municipal taxes can be imposed on you.
Other important sources of income for retirees include income from government, military, private pension and other retirement plans. IT is also the state laws that determine if you are to pay taxes for these sources of income or not. Some states exempt only selected sources of income while others place taxable limits on these sources. It is also possible to be taxed in two states. If you are a former resident of one state, you can be taxed on retirement plan withdrawals. Federal tax formulas are following by some states when it comes to social security benefits and some follow their own specified formulas for this. Some states don’t even provide reimbursements.
When it comes to sales and property taxes, there are states that offer tax deductions on properties bought by retirees and some others provide homestead benefits. There are also tax exemptions of clothing, food, drugs, and household goods which are retiree should also consider.
You don’t have to pay taxes and penalties on Roth IRA withdrawals. But this could not apply to sources of income like annual tax contributions, money from conversion from traditional IRA into Roth IRA, and from earnings accumulated from your contribution.
If your source of income is from annual tax contributions and conversions from traditional IRA to Roth IRA, then tax deductions can apply. The earning that you accumulated from your contributions are subject to income tax.
You can opt for income tax withdrawal if you have not opted for Roth IRA. Withdrawing means owing some amount to the income tax. If not, then you can get a qualified retirement exemption like the 401k.
If you annuitize the account, then it would legitimize a penalty-free retirement account withdrawal before retirement.
These are the tax issues that you need to consider when doing retirement planning.