I want to ask you something. Are you worried about taxes in retirement? Withdrawals from Roth accounts are tax free if you’ve had the account for at least 5 years and are over age 59 1/Accessing the principal from savings and investments is tax free and long period long time capital gains are taxed at lower rates or can even reduce your other taxes if you’re selling at a loss. Your bulk income is from your job and is fully taxable at ordinary income tax rates, when you’re working. Second, your tax rate is used to estimate your aftertax retirement income in determining how much you have to save. This is only true for pension income, withdrawals from taxable retirement accounts, and any rental, business, and wage income you have, when you’re retired. Let’s take a look at most of the reasons why your tax rate in retirement will probably be lower than you think. Remember, amongst the most common mistakes I see people make is overestimating their tax rate in retirement. I’m sure it sounds familiar.|Doesn’t it sound familiar?|Sounds familiar?|does it not? while estimating your future tax rate is a big factor in deciding whether you should make Roth or pretax contributions, as Roth 401 and 403 plans become more common. Of course, social Security is taxed at ordinary income rates but only part of it is taxable. Let me tell you something. This is important for a couple of reasons.
What if all of your retirement income is fully taxable? You have a mortgage and other debts that may be paid off, right? Experts typically recommend that you need about 80% of your pre retirement income in retirement. How much of your income goes to saving for retirement and paying into Social Security? How much do you spend on commuting and other workrelated expenses? Anyways, you have kids that will no longer be financially dependent on you, right? On p of this, will you eat lunch out less often since you’re no longer at work during the day and have more time to prepare your personal meals? You may find that you need less than 80%, when you add all this up. Are you thinking of downsizing or moving to a lower cost area? According to your situation, you may need even less.
You may retire in a lower tax bracket, if your income is lowered enough.
What do we even mean by tax rate? The reason is because the next dollar that you contribute to your retirement account would normally be taxed at the marginal tax rate. Now please pay attention. You probably want to look at your marginal tax rate, when you’re contributing to a retirement account. Here’s why…. Your effective tax rate can be lower, even if you retire in the same tax bracket. Furthermore, that’s the tax rate you pay on an additional dollar of income.
Let’s say I’m a single person with a taxable income of to my 401 pretax, all of that or higher if I was age 65 or older this year. Ok, and now one of the most important parts. The rest would be taxed at 15percent or less.