Published on 08/31/2020
If there is one thing that is certain for people with good incomes is that they have to pay taxes on it. While it may pinch your pocket slightly, it is a part of life and has to be done, like a cycle. Even after you retire, you will have to keep paying taxes on your retirement income. And if you have a business and you are approaching retirement, you may have to pay more taxes depending upon your income.
Naturally, your first instinct right from the moment you get your first paycheck is how to save your hard-earned money leaving your bank account as taxes. And if you have created a retirement fund, high taxes on retirement income can cost you a bomb. Of course, saving tax money is like walking on eggshells. Creating a harmonious balance between tax mistakes and tax-savings tricks is tricky business.
That is why we’ve collated everything that could go wrong when it comes to your financial planning for your golden years. And you could learn from those mistakes, avoid them and make sure you have a stress-free retirement.
The biggest mistake that people who build a retirement portfolio do is ignore taxes. Many people think that they don’t have to pay taxes once they retire. Never think of your retirement fund as a block of money that is safe from taxes. The Federal Government is entitled to taxes on that income as it is on your regular income.
It would help if you started building your retirement portfolio with taxes in your mind. When you don’t consider the tax payout in your financial planning, you could stand to lose your retirement fund much earlier than you anticipated. High state taxes could cost you your retirement.
Assuming lower taxes during retirement
Taxes are a way of life if you have a taxable amount of money in your bank accounts. The tax bracket for you is decided based on the amount of money that you earn. Essentially you pay taxes based on your income. Similarly, you are bound to pay taxes on your retirement income. Just like your income when you are earning, the tax bracket for your retirement fund also depends on the size of your retirement fund.
Hence, you need to understand that lower taxes during retirement is a myth. The taxes on your retirement income will only be lower if the retirement fund itself is small. And a small retirement fund is not going to help you live life king size.
No tax planning
It would be best if you had proper tax planning to save as much tax as you can. Each cent that you save goes towards increasing your retirement corpus. Many people rely only on Social Security benefits for their retirement and do not need a robust tax strategy. However, people with higher incomes need to have a fool-proof tax plan to keep their money safe. It is also advised that people with higher incomes who opt for huge retirement funds meet with a tax advisor or a financial planner or even a wealth manager to help them out.
Not taking into account social security taxes.
This can be a life-shattering moment for many of you- yes, social security income is also taxable as per the IRS norms. Investments in both IRA and 401(k) accounts are taxable, and so are social security benefits. The tax bracket for this can be anywhere from 0 to 85% of your social security benefits.
However, this is not the end of the world for you. A certified financial planner or a tax expert can help you here and suggest ways to minimize the taxes that you owe on your social security benefits. Nevertheless, you can start small by diversifying your savings into two different accounts- taxable and non-taxable. This will at least reduce the taxable amount.
Not investing in 401(k) and IRA accounts.
Having only one retirement fund is not enough to sail you throughout your retirement. If you are someone who only contributes to their IRA accounts or only their 401(k) accounts, it is not enough. The Annual capping on both IRA and 401(k)s does not let you invest more than a specified amount in a year. That is why you need to invest equally in both your IRA account and your 401(k) account for a better retirement. Additionally, you will also be able to diversify your savings and save some tax money with a separate non-taxable IRA account.
There are many other common mistakes people make when they get on the road to retirement planning. Some of these are known, and some of these are unheard of by the common man. That is why MyTaxFiler gets you the best financial advice, so you don’t burn your retirement money in taxes.