The day you retire is a big event to look forward to. But making the change to retirement can be scary. That’s because you’re going from making money and getting paid every month to possibly not making any money at all.
Before you stop working, it’s a good idea to make a budget for retirement. So, you’ll be able to get the most out of your new money and won’t be as likely to spend too much.
At the same time, you should figure out how your taxes work. Here are 3 things you should know about taxes if you are about to retire.
You will still have to pay taxes
There are some dangerous myths about taxes, and one of them is that retired people don’t have to pay taxes. That’s not true at all. Depending on your situation, you may have a low enough income that you don’t have to file a tax return. This has to do with your income, not your age (meaning, you could be in your 20s, and if your income is low enough, the tax-filing obligation goes away).
Depending on the type of plan you have, you may have to pay taxes on the money you take out of your savings.
Good for you if you’ve been saving money steadily in an IRA or 401(k) plan. You should now be able to retire with a nice nest egg. But, depending on the type of plan you have, you may have to pay taxes on the money you take out of your savings.
Withdrawals from a traditional IRA or 401(k) will be taxed. Your total income and your tax bracket will determine how much tax you have to pay. But the IRS will get a piece of your withdrawals no matter what. On the other hand, if your money is in a Roth IRA or 401(k), you can take it out without having to pay the IRS anything.
The money you get from Social Security may also be taxed.
Social Security is a big source of income for a lot of older people. Now, depending on how old you are and how much money you have, you might not be able to claim your benefits right away. But if you do start getting benefits, you should know that they may be taxed, depending on how much money you have in total from retirement.
If you make too little money or if Social Security is your only source of income when you retire, you won’t have to pay taxes on your benefits. If not, get ready to pay. You should also know that some states tax Social Security, so you might owe taxes to the state as well as the federal government.
Avoid a tax surprise.
When you retire, the last thing you want is to have to worry about taxes. If you’re getting ready to end your career in the next year, keep these things in mind.