Taxes are as definitive during your golden years as they are when you are preparing for retirement.   Though there are some great tax benefits while you save for your retirement, there are some facts you should keep in mind that will allow you to plan ahead to reduce your tax burden when you finally begin withdrawing your retirement savings.

1. 401(k) Retirement Taxes

While you work for your employer, you may “reduce” your salary by contributing to an employer-sponsored retirement savings plan, such as a 401(k).  That means the money you contribute from your regular gross earnings are not taxed at all at your current rate.  Rather, the money is tax deferred until your retirement, at which point you will hopefully be in a lower tax bracket. 

Though you may begin making 401(k) withdrawals at age 59-1/2, there are minimum amounts you must withdraw after age 70-1/2.  After that age, unless you are still working, you must make minimum withdrawal payments, or the government will impose a penalty of 50% of the amount you should have withdrawn but did not.  

2. 401(k) Early Withdrawal Taxes

If you want to avoid early withdrawal penalties, you must wait until you are at the age of 59-1/2 before you begin withdrawing your 401(k) funds.  Any withdrawals before 59-1/2 will result in stiff early withdrawal penalties of about 10%. 

Exceptions to early 401(k) withdrawal penalties include using the money for deductible medical expenses, becoming totally and permanently disabled, or if you take the money as an annuity at any age.

3. Roth IRA Tax Benefits

You may consider contributing to a Roth IRA before your retirement.  While traditional IRAs receive your contributions tax deferred, a Roth IRA allows you to contribute after your current salary has been taxed.  The benefit to this facet, however, is that at the time you choose to begin retirement, withdrawals after age 59-1/2 the money is tax-free. 

Similar to a 401(k), a Roth IRA has minimum distribution amounts you must take after age 70-1/2 or you will be penalized at the same 50% rate of the amount you didn’t take but should have.

4. Taxes on Social Security

Your Social Security may or may not be taxed when you retire, depending on your other income.  If your only retirement income is Social Security benefits, then you will be allowed a tax-free status.  However, if you receive other income from a post-retirement job or other retirement income, your Social Security retirement benefits will be taxable.

There are many ways you can optimize your retirement income now by planning your retirement tax status and tax liability of retirement income.  Though you can do it alone, it is always best to work with a qualified retirement wealth manager  at www.kenhimmler.com at or retirement asset management company  like www.iamllc.biz  to help you form a tax strategy that will save you money after you retire.

Authored by Kenneth Himmler, Sr.