Consider Your Taxes When Planning Your Retirement

The formula for how much money you need to sock away for retirement is 80% of your pre-tax net income. This takes into account the fact that your living expenses decline when you don’t work, from transportation to wardrobe and eating out. However, what isn’t mentioned in this formula is that taxes are supposed to drop too, giving you a bit of a tax break from tax-deferred retirement accounts. When you were working, you might have been in a 28% tax bracket, but upon retirement, you may end up lowering that tax bracket due to a lower income. If you have planned for the same income though, you may find that’s not the case. To get the most bang for your buck in retirement, it becomes even more important to pick a strategy that includes reducing your tax burden.

What Gets Taxed and Where

Social security and many deferred-tax retirement accounts will be taxed as income - unless you take measures to reduce that possibility. While the sunshine in Florida can allow for more fun retired couples activities, the real reason most people retire there is for tax reasons. Florida doesn’t have a state personal income tax or estate tax. Many states also exclude social security benefits for retirees from being taxed on their state income tax returns. Property taxes are different in every state. One way to increase the amount of disposable income when you retire is simply to move somewhere where the tax codes are more beneficial.

It’s Not Just About State Income Taxes

Don’t just look at the state income taxes that might be taken from your nest egg. Include the sales tax, property tax, and inheritance taxes you might pay. While it can be easy to just pick a state that has no state income tax, it may not actually be the best over all. The Tax Foundation, at www.taxfoundation.org, tabulates tax burden data by state that anyone can look up online. This data includes sales tax information, not just state income taxes.

Don’t Wait Until You Retire

Planning a tax strategy doesn’t have to wait until you plan your retirement. If you are in a high tax bracket, you will want to take any opportunities to defer your income to years when you don’t make as much, or retirement years. Every year changes in local, state, and federal tax codes change the way they impact your budget. Find a good tax accountant, if you’re interested in keeping abreast of major tax changes and taxing advantage of tax strategies to help you minimize your expenses now and in retirement.