Many taxpayers’ primary financial aim is to have enough money for a decent retirement. It’s also an elusive goal to accomplish. Bloomberg reports that fewer than one-third of working Americans are confident they will have enough money saved to retire comfortably.
You can retire early, of course, if you manage your finances wisely. Sadly, your ties to the federal government will only be severable after retirement. The Internal Revenue Service still wants a cut of your wealth.
Here are the top five potential retirement tax surprises.
The 401(k) and Individual Retirement Account
Your 401(k) contributions may be deducted from your taxable income. Because the deductions are made before taxes, they also reduce your taxable income. One drawback of retiring with a 401(k) is that distributions are still taxable as income.
Similarly, conventional Individual Retirement Accounts (IRAs) are equally treated. Withdrawals from an IRA are subject to taxation as soon as they are considered taxable income. Publication 590 is the IRS’s online guide to the taxes due on withdrawals.
Any growth in value beyond the initial investment from an annuity that begins paying out in retirement is subject to income taxation.
Suppose the annuity was purchased using pre-tax funds from a standard individual retirement account. In that case, the rules are different; instead, the entire sum will be subject to income tax.
Investing while you’re still gainfully working is a fantastic way to put your money to work for you. You won’t be able to dodge paying taxes on your retirement savings, either.
Most long-term capital gains get taxed at a maximum rate of 15% or 20%, depending on your income level. The rate has the flexibility to range from 0% to 28%.
Long-term capital gains for stocks, bonds, mutual funds, and qualifying dividends are taxed at zero, fifteen percent, and twenty percent. One wise use of a tax refund is to spread it across various investment vehicles.
The burden of estate taxes can be mitigated by charitable giving. In 2022, the highest possible annual gift was $16,000, and the sum in 2023 is $17,000.
In addition, in 2022, the basic exclusion amount was $12,060,000; in 2023, it will be $12,920,000.
The catch is that gift taxes still apply to those sums. Moreover, estate tax exemptions are reduced by the amount of any item that can be used to offset the exclusion. Several states also impose inheritance taxes.
In most cases, you won’t have to pay taxes on the payout you get as a life insurance policy beneficiary. It is not considered income and is not required to be reported. Even after retirement, that remains true.
Nonetheless, any interest earnings are subject to taxation. And if you’re the policyholder, things grow more complicated if you surrender the cash insurance, especially if you get more back than the coverage was originally worth.