How Will I Be Taxed in Retirement?
A traditional IRA and a 401(k) are tax-deferred retirement accounts. The money is left in these types of accounts to grow and collect dividends. However, when you start taking withdrawals you will pay taxes. Roth IRAs differ in that contributions are not tax-deductible, but when you begin taking withdrawals this will be tax-free. A portion of your social security benefits may be taxed if your provisional income exceeds $25,000.
A Brookline resident was planning for her retirement. Wanting to make sure she would have enough savings, she contacted Merrimack Tax Associates.
Tax-Deferred vs. Tax-Free Retirement Accounts
One of the biggest differences in retirement accounts is whether the taxes are paid when the contributions are made or when the money is withdrawn. Traditional IRAs and 401(k)s are tax-deferred options. The contributions put into these accounts, interest, and any dividends are tax-deferred. When you begin to withdraw money from these retirement accounts, you will then be taxed. A Roth IRA differs in that the contributions that you make are not tax-deductible but the withdrawals are tax-free.
Social Security Taxes
Until 1983 social security benefits were not taxed, and for some this still applies. This is determined based on the taxpayer’s provisional income. This is your gross income, tax-free interest and 50% of the social security benefits. If this number is between $25,000 and $34,000, $32,000 and $44,000 for joint filers, then up to 50% of your social security benefits may be taxed. If the provisional number exceeds this range, up to 85% of your benefits may be taxed.
Knowing how your retirement savings will be taxed can prevent any big surprises down the road. The Brookline resident now has a better understanding of the best ways to save for her retirement.