Financial Literacy for Everyone
Follow Us
FacebookTwitterYouTube
For Editors

Run Jason Alderman's weekly Practical Money Matters in your online or print publication. Subscribe today

For a photo or bio of Jason Alderman, see our press kit.

For Broadcasters

Sign up for our weekly email and learn how you can play Jason Alderman's weekly Practical Money Matters on your station. Learn more

Summit 2014

Watch the 2014 Financial Literacy Summit
Watch the Financial Literacy Summit webcast that addressed financial literacy needs of the unbanked and underbanked
View webcast

PMM articles

Practical Money Matters
Disputing a credit card charge? Graduating? Leasing a car? Learn important tips from our weekly article series.
Read now

social media

Connect with us!
For daily money tips, quips and pics, follow us on social media.
Like us on Facebook
Follow us on Twitter

Don't forget taxes when planning retirement

By Jason Alderman

When budgeting how much money they'll need for living expenses after retirement, most folks generally include things like housing, medical expenses, transportation – even food and entertainment. But sometimes people forget to factor in taxes, which can have a substantial impact depending on where you live and what your sources for retirement income are.

Plus, many don't realize that if they start collecting Social Security while still working, they may lose a significant portion of their benefit.

Here are a few things to research further before committing to a retirement date:

Taxes on Social Security benefits. Most people can begin collecting Social Security benefits at age 62, albeit at significantly reduced amounts than waiting until full retirement age (65 for those born before 1938; gradually older thereafter). Keep in mind, however, that although many states don't tax Social Security benefits, they are counted as taxable income by the federal government.

It's a complicated formula, but basically, if you're single and your combined income from all sources is between $25,000 and $34,000, you will be taxed on 50 percent of your Social Security benefit. For income over $34,000, 85 percent of the benefit is taxed and below $25,000, none is. For married people filing jointly, the amounts are: 50 percent on combined incomes of $34,000 to $44,000; 85 percent over $44,000; and tax free under $34,000. Go to www.irs.gov and look up Tax Topic 423 and Publication 915 for more details.

Impact of work on Social Security. After opting to collect a reduced Social Security benefit before reaching full retirement age, some people then find they need to continue working to make ends meet. This can backfire: If you earn more than $13,560 a year in wages, you will lose one dollar of Social Security benefits for every two dollars you earn over $13,560. (Income from investments doesn't factor in.)

In the year you reach full retirement age, the Social Security benefit reduction drops to one dollar for every three dollars over the earnings limit, but in the years after that, there is no reduction. Thus, if you think you'll need to continue working to make ends meet, it might be wiser to hold off on collecting Social Security until you reach full retirement age – plus, your benefit will be larger.

Taxes on 401(k) and IRA withdrawals. After age 59 ½, you can start withdrawing balances from 401(k) plans or regular IRAs, without penalty. However, don't forget that you will pay regular federal (and state, if applicable) income tax on the withdrawals. Plus, you'll also have to pay an additional 10 percent penalty on early withdrawals.

Other taxes. Some people consider moving to another state after retirement to avoid high taxes. For example, seven states charge no income tax (although another two do tax dividend and interest income). And five states charge no sales tax. But because property taxes and other cost–of–living expenses vary significantly by community, such moves should only be made after thorough research.

The Retirement Living Information Center's website features breakdowns of the various kinds of taxes seniors are likely to pay, state by state, including taxes on income, sales, fuel, property, inheritances and other items (www.retirementliving.com/RLtaxes.html).

Bottom line: Be sure to consult a financial planner long before retirement to make sure you fully understand all the many tax and income implications. If you don't know a financial planner, www.plannersearch.org is a good place to start your search.


Jason Alderman directs Visa's financial education programs. Sign up for his free monthly e-Newsletter at www.practicalmoneyskills.com/newsletter.




This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and about your individual financial situation.

<< Back to Practical Money Matters

Email to a friend

Your Name:
Your Email:
Recipient's Email:
Message:
Enter code:


The information that you provide through this e-mail feature will not be stored by Visa for any other purposes. Please refer to Visa's privacy policy for details.