If you’ve had a toe in the stock market for more than a few years, you likely have grown increasingly giddy watching your profits pile up. But there’s a flip side to the story: Eventually, you might need to share a lot of those gains with your partner.
If you have put money into Individual Retirement Accounts or workplace 401(k)-style plans on a pretax basis, as millions of Americans have, your investment partner all these years was Uncle Sam. When you start making withdrawals, your partner will want a share of the spoils.
Taxes in sheltered accounts are easy to overlook if you have a long-term focus. But as retirement age approaches, the tax bill will come more into focus too, especially if tax rates start to rise. You might not be worth as much as you think.
“Many households may forget that not all of these (investment dollars) belong to them,” noted Anqi Chen and Alicia Munnell, authors of a report on retirement taxes. “They will need to pay some portion to the federal and state governments in taxes.”
Ed Slott, a certified public accountant and author of “The New Retirement Savings Time Bomb,” puts it more bluntly: Many retirement accounts are “infested with taxes,” he said.
In their report, Chen and Munnell, at the Center for Retirement Research at Boston College, estimated the tax bite on retirement assets for people in various income groups and assuming various drawdown or withdrawal strategies.
They looked at Social Security benefits, pensions, 401(k) plans, IRAs and other financial assets, such as stocks held in taxable accounts. Rental properties, owner-occupied homes, small businesses and other investments also can be used for retirement, but the report didn’t examine those categories. Adding them to the mix could further inflate tax bills for many.
The good news is that roughly four in five retirees and future retirees don’t — or won’t — face a large tax bite on the financial assets they receive or sell to finance their lifestyles, the researchers estimated, typically paying little or nothing in federal and state taxes.
But for those in the top fifth or so on the asset scale, “taxes are an important consideration” that can eat up 20% or more of a person’s retirement income.
Reviewing the basics
It’s often smart to have money in accounts with different tax ramifications. “Like you diversify your investments, you want to diversify your tax strategies,” said Paul Axberg, a CPA and certified financial planner at Axberg Wealth Management in Sun City West.
Money withdrawn from 401(k) plans and IRAs is taxed as ordinary income. Assets in Roth 401(k)s and Roth IRAs are an exception. Roth contributions are made on an after-tax basis, so withdrawals generally come out after tax, too.
In traditional IRAs and 401(k) accounts, investors usually must start pulling out money as required minimum distributions that now start at age 72. Large withdrawals can make other income, such as Social Security benefits, partly taxable.
Social Security benefits are tax-free for most recipients, but not for people exceeding certain income ranges — $25,000 and up for singles and $35,000 and up for married couples. Above those figures, depending on how much Modified Adjusted Gross Income you have, you would pay taxes on up to either 50% or 85% of benefits. MAGI includes regular AGI plus nontaxable interest income (such as from municipal bonds) and half of Social Security benefits.
Tax and timing flexibility among accounts is important. “If you don’t have flexibility, you might need to pay taxes on your Social Security,” Axberg said.
Other financial assets, such as stocks or mutual funds held in unsheltered brokerage accounts, can generate short-term gains taxable at ordinary income rates or long-term gains taxed at lower rates. Interest and dividends from these accounts usually are taxable, too. But there isn’t a requirement to start withdrawing from these accounts at any particular age.
Read the complet article on finance.yahoo.com