Retirement planning is important. You have future financial needs that you need to secure today. With retirement planning, you are assured of a safe and secured future. One of the most important things to consider when doing retirement planning is to study tax matters.
Some retirees wish to continue working even during their senior years. The taxation laws for different states vary and this is something that you should be aware of. You can be in a state that have special exemptions from the income tax of working senior citizens. You can also be in a state where there are no privileges or exemptions on senior income taxes and you will need to pay the same taxes as everybody else. The taxation amount differ between states as well. If you relocate to a new state, then you can also be charged with municipal taxes.
Other important sources of income for retirees include income from government, military, private pension and other retirement plans. It depends on the state laws whether income from these sources are tax exempt or not. Some states exempt only selected sources of income while others place taxable limits on these sources. There are situations when a senior is taxed by two states. You can be taxed on retirement plan withdrawals if you are a former resident of the state. There are federal tax formulas for social security benefits that certain states follow, but other states have their own specified formulas. You can find states that do not provide any reimbursements at all.
You should also consider sales and property taxes on your retirement planning; tax deductions are offered on properties bought by retirees while other states provide homestead benefits. Another thing to consider are tax exemptions on food, clothing, drugs, and household items which are tax exempt.
You don’t have to pay taxes and penalties on Roth IRA withdrawals. But this could not apply to sources of income like annual tax contributions, money from conversion from traditional IRA into Roth IRA, and from earnings accumulated from your contribution.
If your source of income is from annual tax contributions and conversions from traditional IRA to Roth IRA, then tax deductions can apply. But, withdrawals from earnings accumulated from your contributions is subject to income tax.
You can opt for income tax withdrawal if you have not opted for Roth IRA. Income tax withdrawals would mean you owe some amount to the income tax. You can also opt for retirement exemption like 401k.
Annuitizing the account is normally the sure and safest technique to legitimize a penalty-free retirement account withdrawal before the retirement age.
These are the tax issues that you need to consider when doing retirement planning.