We wanted to share an informative CPA Practice Advisor article with you that delves into the taxation of retirement income. It’s essential to be aware of these considerations as they can significantly impact your financial planning during retirement.
- Required Minimum Distributions (RMDs): RMDs for traditional IRAs and 401(K)s now begin at age 73 if you reach age 72 after Dec 31, 2022. While these accounts offer tax benefits during your saving years, remember that retirement withdrawals are subject to ordinary income tax rates, which is crucial to planning for these future tax obligations.
- Roth IRAs and 401(k)s: Roth accounts provide a long-term tax advantage. Contributions are not deductible, but withdrawals are tax-free, provided certain conditions are met. Make sure you understand the rules governing Roth accounts.
- Social Security Taxation: Social Security benefits can be partially taxable, depending on your other taxable income. Understanding this can help you plan for potential tax liabilities in retirement.
- Capital Gains and Investment Income: If you hold investments for over a year, you may qualify for preferential long-term capital gains tax rates, which can be significantly lower than regular income tax rates. Keep an eye on the income thresholds for these rates, as they are adjusted annually.
- Short-Term Capital Gains and Losses: Gains on investments held for a year or less are taxed as ordinary income, while capital losses can offset gains and even other income up to certain limits.
- 3.8% Surtax on Net Investment Income: For higher-income taxpayers, there’s an additional 3.8% surtax on net investment income. Be mindful of this if your income exceeds certain thresholds.
- Interest Income: Different types of interest income, including non-taxable municipal bond interest, can have varying tax treatments. Ensure you’re aware of these nuances.
- Education Savings Bonds: If you’re considering using EE and I U.S. savings bonds for education expenses, they may offer tax-free interest under specific conditions.
- Home Sales: When selling your primary residence, you may qualify for a substantial tax exclusion if specific criteria are met, resulting in significant tax savings.
Please review the Full Article for more details on these topics and consult with your tax advisor for personalized guidance based on your unique financial situation.
