Annuities: The first withdrawals are considered earnings, which are subject to ordinary income taxes plus a possible 10% penalty if you're under 59½. Once the earnings are exhausted, the contributions are not taxable when they're withdrawn. If you annuitize your payments, the portions of them that are considered to be earnings are taxable.
Life insurance cash value: Withdrawals of cash value are the opposite of annuities since they are considered to be nontaxable contributions first and then earnings taxable at ordinary rates. You can borrow from the cash value without paying any tax, however.
Interest: Interest income from things like savings, CDs and bonds outside your retirement plans is subject to ordinary income tax. Since these investments are taxed at the highest rate, they're the first investments you want in your annuities and traditional retirement accounts. (You may want to hold the most aggressive investments in the Roth accounts since the earnings could be tax-free.)
If you're in a high tax bracket, you may also want to consider switching to federal tax-free municipal bonds and money market funds for nonretirement taxable accounts. By picking ones from your own state, you avoid high state income taxes as well. Either way, just be aware that these bonds carry a higher risk of default than federal bonds, as well as bank accounts insured by the Federal Deposit Insurance Corp.
Dividends: Qualified stock dividends are currently taxed at a 15% rate if you're in the 25% tax bracket or higher and a 0% rate if you're in the 15% bracket or lower. However, they will be taxed at ordinary income tax rates of up to 39.6% starting in 2013. Unless the law is changed, you may want to hold high dividend-paying stocks and funds in your annuities and retirement accounts after next year.
Long-term capital gains: Gains on stocks and funds held for more than a year are taxed like qualified dividends (collectibles are taxed at 28% though). In 2013, the rate will go up to 10% if you're in the 10% or 15% brackets and 20% if you're in a higher bracket. Since these rates are lower than your ordinary income tax rates, you may want to hold long-term stocks outside your retirement plans. In addition, you can sell stocks at a loss at the end of the year, use the losses to offset other taxes and then repurchase the stocks after 60 days. You can also give away appreciated shares of stock instead of cash to avoid having to pay capital gains taxes on them.
Short-term capital gains: Stocks held for less than a year are taxable as regular income. For this reason, it's best to keep mutual funds that trade a lot in annuities and retirement plans.
Social Security: The amount of your Social Security that is taxable depends on your total income. You can use this calculator to estimate how much of your Social Security will go to taxes. Two ways to reduce taxes on your Social Security benefits are to delay them until you're no longer working and to avoid taking taxable retirement-plan distributions while taking Social Security, since both sources of income could cause a greater portion of your Social Security to be taxable.
Once you know how your sources of income are taxed, you can use this calculator to estimate how much federal income tax you'll have to pay. This will help you figure out whether you'll have enough income after taxes to retire. The last thing you want is to have your retirement plans thrown off by a big tax bill in April.
Finally, don't forget that your state may want to tax some of this income too. The good news is that many states don't tax Social Security, pensions or retirement-plan withdrawals, and some states don't tax income at all. You can check out this site to see how different states will tax your income when you retire. Not having to pay state income taxes can make moving to a warm, sunny state like Florida that much more enticing.
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VIDEO ON MSN MONEY
Retirement a thing of the past, Joey?
Sheesh, what have I been doing since the summer of 2001.
Never worked for Facebook, either. Don't even use it.
Will taxes derail your retirement? Don't know so much about wether or not that may happen but you can be damn sure of one thing. Taxes will always go up unless you can buy off the man who pays the tax man to come take your money. If you don't have that kind of money, then you will pay more taxes no matter what.
Government never does with less. It is always more and more. Go look into the funding that any government program recieves. They all have a budget, if they come in under budget they will get less money the next year. Just ask the one who is head of that program about funding. They might tell you the truth. No program will ever come in under budget. Every one of them will spend their entire budget before the end of the year. Many will just use it to throw a party. This way they will get the same money the next year and they will request more. Often they will get more the next year. They will call it a cost of living adjustment or some other nice name to cover the fact that is it nothing more than fiscal wastfulness disguised as said adjustment.
Either way they will get more. The only way that government gets money, that they will account for, is through taxes and this funds their programs. You can ignore all the hidden money in the background that flows between the special interests and politicians, shhh it isn't happening, it is just your imagination... So your taxes will go up no matter what as they make more and more programs and as those programs waste more and more just by the very nature of how they work or don't.
The next most wonderful thing is that in general government will never do with less. When the work force dwindles and they need to bring in a trillion dollars per year for 150 or so people and that force shrinks to say 100 million or so per se. the goverment will seek way to raise taxes Understand that just because 50 million+ Baby Boomers are retiring, they might not be replaced in the work force. So government will adjust accordingly, 33% or so in the case, to keep bringing in that trillion. But since they always grow, they always want more than that as it goes.
Now if we get say 50 million more who will work enough to pay pensions and taxes for the rest of us and work for peanuts... hmmm. Since the average age of the American is about 37 yrs old. It sure isn't going to be an American that will do that. Unless maybe they have no other choice and are about to be homeless or starving... Ahhh that will never happen. It will be just fine. All is well. Move along, move along. The Dream is American, don't wake up. Have to love this game today.
Will taxes derail your retirement? Maybe. Will your retirement not be what you think it will be because of taxes? Yes Will taxes potentialy ruin the plans you have for your retirement.? yes. Could taxes derail your retirement? Yes. Should taxes derail tyour retirement. No. You just have to love the press and government for how they will pose a question. Without a doubt they are masters of rhetoric in it's classic and most pure definition.
The article has a lot of good information, however does NOT help those HIT by this recession!
Many not wanting to retire were forced out of the workforce, prematurely. Most of the "rules" explained in the article still hold true, but doesn't help those affected.
If you haven't worked in a year, Unemployment (what little it does help) runs out and YOU're Hungry, have BILLs to pay, going after these sources is sometimes, UN-avoidable. With penalties or not, they are the last resort of many.
Thanks for the information MSN, but doesn't help, if your one that has "Slipped through the Cracks".....
Taxes are not the only government threat to retirement. Local fees in my city have risen at least 10% annually with no commensurate increase in the quality or frequency of service, i.e. trash, sewer, street cleaning.
Parking ticket fines increased similarly. A simple, minor parking tickets costs $58. Moving violations cost a minimum of $242. The government is balancing the budget on the backs of the accused. To go to trial takes a year and one must post cash bail in the amount of the fine to go to trial.
With the lack of foresight of the politicians and lack of accountability of the finance advisors, pension costs are skyrocketing. The California Legislature even voted to allow their select staffers to buy "air time" to increase pension pay for time they did not work.
Working class taxpayers have no chance. Retirement is an illusive dream.
"If you take your pension while you're still working, the extra income could push you into a higher tax bracket, so you may want to delay your pension until you stop working"
Not sure I agree with this statement. As long as the pension isn't time limited (most aren't), you may pay more marginal taxes on your non-pension income, but your take home would still be greater with the combined pension and non-pension income.
Several years later, after 8880 is no longer a HUGE advantage convert that accumulated IRA as long as effective tax rate is below 28%, you are paid - paid quite well to convert for future tax free retirement...of course, pay those taxes with non-conversion cash to avoid a nasty penalty.
Young Al and Brenda have a 6 year old daughter they file a joint return
Al has 15,299 in wages
they got a nice refund last year of 1000 from child credit and EIC
they have 160 in dividends
they also (bear with me here) won a radio prize worth 2,800 and hit the slots for 3,700 this year - unlikely, but this is for effect - helps the EIC...
they decide to put last years refund to work in an IRA and also put 3000 into an IRA too - total 2000 each
AGI ends up being 33939
tax is 1108
Form 8880 credit eats up the tax at 1108, 0 tax
This year EIC 1152 refundable
this year child tax credit 1000 refundable
Nice start on next year's IRAs
rinse and repeat. Convert when ready.
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