You’re steadily increasing your retirement contributions while paying down debt and giving some serious thought to your desired lifestyle in retirement. One thing that many would-be retirees fail to consider is how taxes will impact their retirement. Here are three retirement tax considerations you may need to anticipate.

1. Withdrawals from Your Retirement Plan Are Taxable

One of the benefits of using a tax-advantaged account to save for retirement (like a 401(k) or traditional IRA) is that you can deduct your contributions on your taxes, allowing you to reduce your tax liability.

However, when you withdraw money from these accounts, you’ll have to pay taxes on your withdrawal. If you plan on withdrawing a certain amount to cover your expenses, you’ll need to take out more money to pay taxes on this withdrawal.

For many people, tax-advantaged accounts are still a smart option for saving for retirement, as many individuals are in a lower tax bracket in retirement.

There are a couple of ways to deal with retirement withdrawal taxes. You can adjust your withdrawals to include the taxes or adopt a tax strategy to minimize your tax liability.

Another alternative is to use after-tax retirement accounts, like the Roth IRA or Roth 401(k), to reduce your tax liability on retirement withdrawals. You pay taxes on your contributions to these accounts, but your money can grow tax-free. Your qualified withdrawals are also tax-free.

If you anticipate being in a higher tax bracket during retirement or want to hedge your bets, utilizing after-tax accounts is an excellent option to explore.

2. Your Property Taxes are Likely to Increase

Retirees who plan to own property in retirement should expect their property taxes to increase at some point, usually due to increases in their property’s assessed value or increases in their state and local property tax rates.

Leave a little room in your budget to accommodate increases in your property taxes. You should also see if your state or town offers programs permitting individuals who meet certain age or income guidelines to reduce their property taxes.

Or, if you’re planning to relocate during your retirement, consider an area known for having affordable property taxes.

3. Your Roth IRA Needs to Meet Certain Guidelines for Tax-Free Withdrawals

Many individuals embrace the Roth IRA to provide them with tax-free distributions during their retirement. However, to make sure that your distributions are always tax-free, your Roth IRA must adhere to the following guidelines:

  • You’ve had your Roth IRA for at least five years
  • You’re 59.5 or older

If your Roth IRA is less than five years old, your withdrawals are potentially taxable, even if you’re 59.5 or older. Note that your retirement contributions always qualify for tax-free withdrawals; it’s your Roth IRA earnings that are subject to taxation.

Create a Financial Plan to Prepare for Your Retirement

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Advisory services are offered through Quantum Strategies, LLC dba Quantum Strategies, a Registered Investment Advisor in the State of Pennsylvania. Insurance products and services are offered through William Rizzo, Sole Proprietor.