Preparing for our retirement is one of the best, smartest financial decisions we must take care of. Giving an early start will only bring benefits in the long run. Which is why we should always consider one of the many strategies of tax planning for retirement. Knowing how each work will help us be more prepared for the future. It will also help us make an informed decision regarding how we want to allocate our savings for when we need them.
Some of the most common strategies of tax planning for retirement include our social security check income, having a 401(k) plan, IRAs, and tax credits for the elderly. There are other options available, but we will only focus on these four.
Social Security Check Income
Most of us make payments to the Social Security program during our years of career. Once we are eligible to start receiving our Social Security check, though, such income might be subject to taxes. A good strategy for tax planning for retirement regarding social security income is being aware of our adjusted gross income. In order to avoid or reduce taxes on or socials security check, we need to avoid hitting certain caps. For example, if we hit $25,000 as single or $32,000 as a married couple, our Social Security Check starts becoming taxable.
Several employers offer this retirement plan on which they make contributions that will later become retirement resources. This is a particularly interesting strategy of tax planning for retirement because of the options it offers. With a traditional 401(k) plan, our contributions will be made from pre-tax amounts, but any withdrawal will be subject to taxes. With a Roth 401(k) plan, however, our contributions come from after-tax amounts, but withdrawals aren’t subject to taxes.
Individual Retirement Accounts (IRAs)
Another very common strategy of tax planning for retirement is getting an Individual Retirement Account or IRA. Just like 401(K) plans, there are two versions of IRAs that we should consider. You can opt for a Traditional IRA or a Roth IRA for your retirement funding. Similar with 401(K) plans, you can make contributions to your Traditional IRA account with pre-tax money but having withdrawals subject to taxes. If you decide to go for a Roth IRA, your contributions can come from after-tax money, avoiding taxes on withdrawals. The amounts of our contributions and other restrictions might depend on the adjusted gross income we report, as well as whether we have individual or joint accounts.
Tax Credit for the Elderly
The last alternative for tax planning for retirement includes claiming a tax credit that the IRS offers. If you are 65 or older, or if you retired on permanent and total disability, you can be eligible for this credit. There are several limits that we can’t pass in order to qualify for this credit, though. To begin with, if we are married, our spouse needs to file a joint return with you in order to qualify. Also, our income can’t go over a certain amount in order to qualify for this credit. You can consult all the details here.