Taxes And Retirement
Posted by Richard on April 10, 2019
Upon retirement, you don’t get a paycheck with the proper amount of taxes withheld. That’s obvious.
What may not be so obvious until you retire is the amount of taxes you owe. Unlike employees, retirees write checks for their taxes, making them acutely aware of their tax burden.
Of course, everything we save for retirement is taxable at some point and in some way.
If you are ready to retire, here are some things to look forward to:
– Social Security taxes: You have to pay tax on your benefit. You can have amounts from 7 percent to 22 percent withheld from every check. See form W-4V (for Voluntary).
– Pension and annuity taxes: See Form W-4P to instruct the payor how much to withhold.
– IRA distributions: The law requires 10 percent be withheld unless you tell the distributor not to withhold. You can also tell the distributor to withhold all of the taxes.
– Company plans and lump sums: Some of these plans are taxed at 20 percent.
How to pay taxes when retired:
Many retirees have to pay taxes quarterly, usually in April, June, September and January.
The idea is that each retiree should estimate the amount of taxes they will pay the next year. Use Form 1040-ES to figure estimated taxes.
Underpayment on these quarterlies results in a stiff penalty. One way to avoid the penalty is to take your previous year’s tax bill and divide it by four. The IRS accepts this as a valid estimate.