Nothing in life is permanent. Everything is transient. That is why we must be secured, especially in financial terms, in case things go out of control. We must be always prepared for the future and that is why good retirement financial planning is most practical for a safe and secured future. Financial planning is very crucial like life planning and it requires lot of calculative and methodical moves, like choosing a home involves lots of tax factors like state and local taxes. Retirees should carefully study the tax matters before formulating the retirement financial strategies.
Retirees who wish to continue with their work during their golden years should be aware that the state taxation income varies widely for them and some states support their earned income and provide them extra privileges. Some states consider the retirees income like everyone else's and some impose tax on all the earned income. Sometimes the taxation amount varies a lot between states. Retirees shifting to new domicile should watch out for the municipal income taxes.
Income from military, government, private pension and other retirement plans are increasingly important sources of income for some retirees. Some states exempt incomes generated from such sources, while some exempt only selected ones. Some place taxable limits on such sources. Some states even tax former residents on retirement plan withdrawals and create a possibility of tax in two states. Some states strictly adhere to the federal tax formulas under the social security benefits and others follow their own specified formulas, while some don't provide any reimbursements at all.
Retirees should also consider the sales and property taxes, as some states offer tax deductions on properties purchased by retired seniors while others provide homestead benefits. Retired seniors should also study the tax exemptions provided on clothing, food, drugs and household goods. US tax code generally deems the retirement age and sometimes you might face the ugly tax brunt while tapping tax favored retirement benefits. It is very complex to avoid federal income tax, but it is possible to avoid the 10% penalty provided you plan way ahead.
Opt for the IRA withdrawals
If you use the Roth IRA withdrawals then when you withdraw your contributions, they are federal income tax free and penalty free, but sometimes this could be tricky if the source of income is from the following three sources:
- Money from annual tax contribution
- Money generated by converting tradition IRA into Roth IRA
- Earnings accumulated from your contribution
Tax deductions apply to only the first two sources and withdrawal before the retirement age from the third source is usually subjected to income tax.
Advantage of penalty free exemptions
If you have not opted for Roth IRA than the best option would be to opt for income tax withdrawal. Whenever you withdraw, you would owe some amount to the income tax. If you wish to break the rules, then switch to qualified retirement exemptions like 401(k).
Annuitize the Account
This is normally the surest and safest technique to legitimize for a penalty-free retirement account withdrawal, before the retirement age of 59 years and 6 months.
© 2008 Anna D. Banks, GCDF
Anna D. Banks, a passionate advocate for baby boomers in exploring their priorities, planning and setting goals for the next stage of their lives. Assisting her clients to attract and build a professional and personal life consistent with their values is not just a goal of Anna's, it's her passion. Her diverse work experience in business, education and financial services enables her to help the diverse population of baby-boomers with their life, career, and personal finance coaching needs. Anna is currently Adjunct Faculty at Essex County College, where she teaches Career Development & Management.
Author's Note: Do you have any questions about career development or lifestyle changes for Baby Boomers, which you think others, like you, would want to know the answers? Please place a post on http://www.annabanks.com or email your questions to me at Anna@AnnaBanks.com