Taxes – Plan for Retirement Changes – Redux

Now that tax season is upon us, I figured it was a good time to re-post this one from 2021. Your taxes will not only be impacted for the year you retire but changes in your income stream will affect your taxes every year after. Since you may be taking withdrawals from 401k’s and investments, potentially receiving a monthly pension and/or social security, and maybe working a bit, your income sources will be taxed differently from when you were working full time. With that in mind, the post below is a reminder that advance planning is the key to avoiding nasty surprises at tax time.

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       We just had our taxes done for 2020 and we weren’t sure what to expect since our financial situation has changed so drastically. I had my paycheck for the first five weeks of 2020 then moved to a monthly pension check and drawing on our investment funds. While our health insurance is deducted from the gross pension check and I have both federal and state taxes deducted, the amounts I chose were best guesses based on our tax rate. Turns out my guesses were pretty good and this year’s tax calculations came out in our favor.

      It’s important to plan for tax changes as part of your retirement planning. You need to be ready for the transition to investment, social security (depending on your age), and/or pension income as even though it may be much lower than your salary, the way you are now being taxed could be different. The last thing you want in retirement is to get a nasty surprise at tax time, so be sure to discuss tax implications with your financial planner and/or tax preparer well in advance of retirement. Having someone knowledgeable to work with will help ease your transition and will get you prepared for that first year and the years to come.

      As my wife is self-employed with her home staging business (http://www.ready-set-stage.com) her tax calculations add another wrinkle to the equation. If you as the retiree have a side business or your spouse has his/her own business, the tax implications have to be built into your retirement tax plan. If the tax effects are variable year to year, the best way to avoid nasty surprises is to go with an estimate based on worst case tax scenario. Better to err on the conservative side especially in the first retirement tax year.

      A short post this time around, but a timely reminder about taxes and the potential changes that can occur as you transition from regular paychecks to alternate forms of income. Including taxes in your overall retirement plan will make the transition less stressful and could help you keep more of your money.

I’ll be taking the next 2 weeks off for our annual “Get the hell out of NJ in Feb.” trip.

Next post will be first week of March (Wow, the year is flying by already!)

www.RetiredandInspiredat55.com  2-12-2024