When it comes to retirement and taxes , it is important to make sure that you stay in a low tax bracket. Doing so will ensure that your retirement savings lasts longer. There are many tax-deferred retirement accounts available, but that tax comes due when we begin to withdraw the money.
The ideal bracket to be in is the 15 percent bracket, as this will help with avoiding a 25 percent or higher tax rate. In order to remain in this specific bracket, your adjusted gross income (amount you “make” after deductions and credits) should be less than $35,000 per year.
Joe Udo, in his article about avoiding a high tax bracket after retirement, assures that it is possible. He believes that fears about retirement and taxes can be alleviated by combining two types of retirement accounts. He explains that the key is to understand that annuity, pension, and Social security are each taxed at a different rate.
The example he uses shows that a retiree who needs $3,000 per month to cover expenses can withdraw $20,00 from a 401(k) or traditional IRA (Individual Retirement Account), and end up paying a tax rate of about 13.75 percent.
While he says that this is a good start (giving the retiree about $2,500 per month), but still leaves them short for the month. If the retiree has set up a Roth IRA or Roth 401(k), they can take from these accounts, as the income tax has already been paid and, therefore, would not affect the tax bracket.
He writes that Roth IRA and after-tax accounts are important to invest in, because, “While you don’t get an immediate tax break, these accounts add tax diversification to your portfolio that can be extremely useful when it’s time to withdraw the money.”
These two types of accounts can help retirement and taxes, by helping you stay in a lower tax bracket and, therefore, help you have more money after you retire.
Here are some additional tips about retirement and taxes:
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