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How do Taxes Work When You’re Retired?

Ah, retirement. A well-earned rest after decades of hard work. From now on, you can sit back and focus on your hobbies and family and whatever else you’d like to. Meanwhile, you’ll receive social security checks and possibly pension money (or something similar) to live off of.

Your finances pretty much take care of themselves at that point, right? Well, not exactly. If anything, you need to be more cautious with your finances during retirement, since your funds tend to be more limited.

You need to account for everything, and that includes taxes.

Yes, even in retirement, you have to pay taxes. They work a little differently, though. Here’s the breakdown.

Working Tax Rate vs. Retirement Tax Rate

Taxes vary from state to state and job to job. However, the majority of people end up paying around 30% of their earnings in taxes. When you’re retired, any income you have coming in gets taxed at around 15%.

That’s because you’re no longer paying social security or Medicare. Also, state taxes and fees are sometimes reduced for retirees.

This applies to pensions, side income, rental properties, etc. As for social security, that gets taxed as well, but not all of it.

What About Money I Have Put Away?

If you had pre-taxed money put away in some special account, it may get taxed when you take it out, depending on what type of account it is and how much you take out at a time. Withdrawals from a Roth account are tax free if you’re over 59 and a half years old, and you’ve had the account for 5 years or more.

How Much Money Should I Have When I Retire?

With all of this talk of taxes and retirement, you might be wondering how much money you should have when you retire. Many experts recommend you have about 80% of your previous income each month. That could be through a combination of social security, retirement earnings, savings accounts, and more.

Truthfully, it ends up being less than 80% for many. By the time you reach retirement age, cost of living should be lower, assuming any kids are out of the house, all/most of your debts should be gone, etc.

The best way to make sure your financials and taxes are in order is to consult a professional. For personal taxes, business taxes, general finances, and payroll services in Springfield, Ohio, you can trust in team at LWS Tax.

Posted by admin | in Individual Tax