Tax payments after Retirement

[JoanK1]

I am 72 yo and retired.  When I was younger and working in NYC in a company that had a retirement savings plan, I was encouraged to save money with pre-tax income.  The reasoning was that when I retire and withdraw the money the taxes would be much lower.  Now I am planning to buy a co-op apartment and would need to withdraw a considerable amount of money from my IRA, but the taxes I would need to pay are so high, probably higher than when I originally deposited the money.  I don't see the point of pre-tax savings since now I feel I can't really use the money without a stiff penalty.

Is there any way to avoid paying these high taxes now that I am retired and need the money?

[conniem123]

Hi JoanK1,

Hope you are having a good day!  The pretax contributions to a retirement account , typically result in lower tax when you retire and withdraw because your income is typically lower when you retire, and thus you are in a lower tax bracket.

Since you have funds in a pretax plan, such as a 401(k) or funds in an employer-funded pension, withdrawals you make from these plans after you retire are generally subject to income tax. You can usually have the plan administrator deduct taxes from your distributions — but, depending on your tax bracket, it may not be enough to cover your bill.

Ultimately, your tax rate is based on all your taxable income during the year. If you have multiple sources of retirement income, you'll save on your taxes in retirement if you limit distributions from pretax plans to only the amounts you need or are required to withdraw.

Unfortunately if you need to withdraw a larger amount from the retirement account, there is not way to avoid  from reporting it as taxable income.  Here is a great resource,

• Taxes in Retirement: 7 Tips for After You Retire

I hope you find this information helpful!

Connie

[JoanK1]

So if I invested $100 pre-tax 25 years ago and over time that money grew to $300, would I now have to pay tax on the entire $300?  In that case it would have been cheaper to pay the tax on the original $100......

[conniem123]

I understand your concern as far as the taxes paid on taxable income.  Think of it this way; when you were having the pre-tax contributions, that was less taxable income, so saved on taxes.  Your contributions have grown and since in a retirement account you have not had to pay tax on the earnings, so saved on taxes.

Now that you withdraw you will pay tax on the earnings also, but your tax rate should be lower since you do not have other income, such as wages.  Either way you would pay tax on earnings; each year if you had invested the money, or future when withdraw the earnings.  The concept is that you should have less taxable income in your retirement years, which result in less tax due to a lower tax bracket.

I hope you find this helpful!

Connie

[JoanK1]

Yes my taxable income is less now that I am retired, but I still seem to be in the 30% tax bracket.  My only income is social security and a small pension, which gives me just about enough to live comfortably.  How little do you have to make in order to get into a lower tax bracket???

Thanks for answering my questions.

[conniem123]

You may want to review your 2022 income tax return, and look at your tax on your Form 1040 line 24, as a result of your taxable income on your Form 1040 line 15 to confirm your blended tax rate.

Here are the 2023 tax brackets, https://turbotax.intuit.com/tax-tips/irs-tax-return/current-federal-tax-rate-schedules/L7Bjs1EAD

I hope this information is helpful!

Connie