Taxes. They're unavoidable, no matter what stage of life you're in. And that extends to retirement.
In the course of your retirement planning, be sure to account for these key tax issues. Otherwise, you may be in for a series of very unwanted -- and unpleasant -- surprises.
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1. Social Security benefits are taxed
Many seniors are shocked to learn that Social Security benefits are subject to taxes at the federal level. And it doesn't take a very high income threshold for that to be the case.
Taxes on benefits hinge on provisional income, which is calculated as your non-Social Security income plus 50% of your annual benefit total. If you're single and that number exceeds $25,000, you could face taxes on up to 50% of your benefits. If that total exceeds $34,000, you could be taxed on up to 85% of your benefits.
Married couples get a bit more leeway on provisional income, but not much. Once that income exceeds $32,000, couples face taxes on up to 50% of their benefits, and when it exceeds $44,000, taxes on up to 85% of benefits apply. If these limits seem very low, it's because they haven't changed in decades.
Also, while most states don't tax Social Security, there are 13 states that do. And so all told, there's plenty of opportunity to lose a chunk of that income source.
2. RMDs could create an additional tax burden
Unless you've saved for retirement in a Roth IRA, once you turn 72, you'll be liable for required minimum distributions, or RMDs. If you have a Roth 401(k), those mandatory withdrawals won't add to your tax burden. But if you have a traditional IRA or 401(k), those RMDs will be taxable.
Furthermore, your RMDs could bump you into a category where your provisional income increases. The result? Taxes on your Social Security benefits.
The best way to avoid RMDs is to take advantage of a Roth IRA. If your earnings are too high to fund one directly, you can convert a traditional IRA to a Roth account instead.
3. Your property taxes could increase
Many seniors enter retirement mortgage-free. But even if you manage to pull that off, you'll still have property taxes to grapple with. And there's no telling how much those might increase.
If your home value rises through the years, you can expect your property tax bill to increase proportionately. And that could end up throwing your retirement budget off course. Unfortunately, property taxes are unavoidable, so the best you can do if yours rise is attempt to appeal them.
Taxes can be a huge burden at any point in life, but in retirement, they can be even more stressful. Gear up for these tax situations so you're not thrown for a loop while you're trying to enjoy your senior years. If you prepare for taxes on Social Security benefits, RMDs, and property tax hikes, you can take steps to cover those costs rather than have them wreck your finances out of the blue.
