Whether you’re a new retiree planning your first days of freedom from the workforce or a seasoned beachcomber and grandkid cuddler loving your retirement, one thing is certain: You’re still going to have to pay taxes.
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Though most retirees are well aware that they’ll have to keep their visits with the taxman, you still might be surprised at the changes in paying taxes once you’ve clocked out of the office for the last time.
To help you prepare for the hidden, or not-so-hidden, tax-related surprises that might be coming your way, GOBankingRates talked to Thomas Brock, CFA, CPA, an expert contributor for Annuity.org.
We also checked in with two members of the Alliance of Comprehensive Planners: Rorik Larson, CFP and owner of Essential Finance Strategies, as well as Susan Einberger, CFP, MBA, owner of Enjoy the Ride: Financial + Life Planning.
Here are five retirement tax surprises you need to be ready for.
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You Need To Take RMDs
Brock said one of the biggest surprises that many retirees, especially new retirees, may encounter is the need to take required minimum distributions (RMDs). RMDs are IRS-mandated minimum withdrawals associated with 401(k) and 403(b) plans, as well as traditional individual retirement accounts.
Once you turn 73 years old — or 72 if you blew out the candles on your birthday cake before Jan. 1, 2023 — you must take a distribution every year. If you don’t, you will get a nasty surprise in the form of a steep penalty: 25% of the required distribution.
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You Can Also Potentially Minimize Your RMDs
Just as many retirees might not know that they should start planning for their RMDs, they also could be unaware that there are ways to postpone or minimize distributions. Brock said working longer or buying a qualified longevity annuity contract (QLAC) is a good place to start.
However, they’re not get-out-of-RMDs-free cards. “There are limits on how much you can put into a QLAC, but the amount invested is exempt from the RMD rules,” he said. “With a QLAC, you can defer receiving distributions until age 85.”
You Still Need To Worry About Withholding
When you were collecting a regular paycheck, your employer withheld your income tax. Now that you’re taking your morning coffee on the deck instead of your desk, you’ll have to be proactive about managing your withholding. Otherwise, you could get hit with a large tax bill at the end of the year.
To make sure your retirement remains a time of well-earned relaxation, Larson suggests that you consider having withholding taken out of your IRA, 401(k) and pension payments. Setting up withholding from these retirement accounts is much easier than making estimated payments.
Estimating your tax liability doesn’t have to be as difficult as it seems. Larson advises retirees to request withholding at the level of their tax bracket. If you’re in the 22% tax bracket, set your withholding that way. Then go out and enjoy some time in the sunshine.
Your Accounts Are Taxed Differently
While paying taxes will remain inevitable, the ways in which income is taxed can differ. For Einberger, understanding the nuances in how various accounts and income streams are taxed is essential for retirees. Yet all too often it’s an aspect of retirement that remains under-discussed.
For instance, retirees may not know that while tax-deferred qualified accounts such as traditional IRAs and 401(k)s are subject to RMDs, Roth accounts actually aren’t.
“Having retirement funds in different account types creates ‘tax flexibility,’” Einberger said. “For example, a retiree may have $100,000 in income, but only $75,000 is taxable because of which accounts the money came from.”
Your Social Security Can Be Taxed
Up to 85% of Social Security benefits may be taxable — a fact that many retirees are surprised, and generally not too happy, to discover.
Einberger said single people with combined incomes of over $25,000 or married people with combined incomes of $32,000 can expect to pay taxes on their Social Security benefits.
“These income thresholds are not indexed to inflation and haven’t been adjusted since 1983,” she said. “Paying taxes on Social Security is the norm, not the exception.”
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This article originally appeared on GOBankingRates.com: I’m an Accountant: Here Are 5 Retirement Tax Surprises You Must Prepare For