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Will My Pension Payments Affect My Social Security Payments?
Not in the way you’re probably thinking, but the answer may be yes. Generally speaking, the answer is no. Your Social Security payments depend on two factors only: the age you started to receive Social Security benefits, and the amount of contributions you made to Social Security over the years. Your pension comes from your employer, and Social Security comes from the government. However, your tax liabilities might depend on the combination of your pension and Social Security benefits, and you social security benefits can actually be taxed. In one of the few calculations that has not been indexed for inflation lately, if your retirement income is over a certain number, up to 85% of your social security may be subject to tax as income. Continue reading...
What if I Want to Retire Abroad?
Retiring abroad requires additional planning to account for visa requirements and currency exchange factors, but like any financial goal it can be reached with proper planning. Retiring in the U.S. is difficult on its own, given rapidly rising cost of health care and the fact that most Americans under-save. Retiring abroad, while possible, makes matters even more difficult. Amongst other factors to consider, a retiree needs to plan for a myriad of additional costs such as tax implications, currency fluctuations, visa requirements, and health care. Continue reading...
How do my IRA Withdrawals Get Taxed During Retirement?
Different IRAs have different tax treatments. Traditional IRAs, as well as SEPs, SIMPLEs, and 401(k)s are all taxed as income in retirement. Roth IRAs are not taxed. Traditional IRAs and the other pretax accounts will have distributions that are also includable in the Modified Adjusted Gross Income calculations which may subject them to 3.8% Medicare surtax, as well as the income calculations which determine what portion of Social Security income may be taxable in retirement. Continue reading...
Who Pays for Medicare?
Taxes pay for the entirety of Medicare part A. For the optional or supplemental policies which fall under the Medicare moniker, a regular premium may be due, but it’s still better than what premiums would look like if there were no Medicare. The Social Security Administration (website—here), which is funded by taxes deducted from your paycheck under FICA, or as part of the “self-employment tax,” administers both Social Security and Medicare. Continue reading...
How Do I Take Money From My 401(k) After I Retire?
Different 401(k) custodians will have different distribution options available to participants in retirement. After you retire, you have at least two disbursement options: lump-sum distribution and periodic distribution. If you take a lump-sum distribution that is not bound for an IRA, you will incur a significant tax bill, since all 401(k) distributions are taxable. Periodic distributions may mean that every so often you can choose an amount to be paid out to you on a quarterly basis, for example, while your investments remain intact and you attempt to accrue more interest on your money. Continue reading...
What are Periodic Distributions from a 401(k)?
Periodic distribution is a planned intermittent payment of cash from a 401(k). If you choose to have your money distributed periodically, you will usually have a choice between monthly, quarterly, or even annual payments. Money distributed periodically is not subject to the same 20% withholding the lump-sum payment is. The periodic payments are treated as wages, and, because plan participants taking these payments in retirement may find it easy to calculate what their income will be for the year, they can instead plan for their actual tax bracket, or opt-out of withholding if they prefer. Continue reading...
How Much Should I Withdraw from my Retirement Accounts Once I Retire?
A general rule-of-thumb is to withdraw no more than 4% of your retirement savings per year. Since your retirement money has to last you for the rest of your life (and in most cases, your spouse’s), it’s extremely important to carefully calculate how much you can withdraw each year without risking running out of money. Retirees should avoid withdrawing more than 4% of your total retirement assets in any given year, and that’s assuming that your assets are invested for growth over time (with some equity exposure). Continue reading...
Can I Take a Periodic Distribution from my Pension Plan?
Regular pension payments are periodic distributions. Yes. This will be the default option on pension arrangements, unless companies are trying to settle with pensioners for lump-sum amounts that will lessen the plan’s long term liability. The options for periodic distributions will always be for periods less than or up to a year in length. Periodic distributions can help you sleep better at night, knowing that you have a fixed stream of income for the rest of your life. It may not be enough to sustain your lifestyle completely, but it will give you a sense of financial security and prohibit overspending in a way that the lump-sum distribution does not. Continue reading...
How Does Social Security Work?
Social Security uses mandatory payroll taxes to grow trust funds that are used to pay income to retirees and other qualifying persons. Any surplus that is collected in a given year and not paid out is used to purchase Treasury Bonds, which pay a guaranteed rate of interest to the trusts and allows the government to use this surplus money in the meantime. When you receive your paycheck, you’ll see a deduction for FICA (Federal Insurance Contributions Act), which is a “combined payroll tax” for both Social Security and Medicare. Continue reading...
When Do I Have to Withdraw Money from My Roth IRA?
Roth IRAs are not subject to RMDs, which means you aren’t forced to make withdrawals. In most retirement accounts, Required Minimum Distributions will be mandatory once the account holder turns 70 ½ years old. This does not apply to Roth IRAs. They are basically the only tax-advantaged retirement account that does not have to take RMDs. This is partially because the IRS wants to make sure they get some of the taxes out of the money that was invested on a pretax basis. Continue reading...
What is Income Tax?
Income tax is paid to the government based on the amount of income earned. There are federal income taxes, and some states have their own income taxes, too. As an employee for a company, income taxes will be withheld from paychecks using the company’s best estimation of your annual earnings. At the end of the year it may turn out that they withheld too much, and the government may give you a tax refund for what was overpaid. Continue reading...
What Happens If I Withdraw Money From my Cash-Balance Plan After I Retire?
You may not be able to make non-recurring withdrawals of various amounts from a Cash Balance plan. After you retire, you’ll typically have two options: a fixed monthly payment for the rest of your life, or a lump-sum payment. Cash balance plans generally do not allow random, non-recurring withdrawals because the individual account was always a hypothetical account. The administrative work of fetching various sums for everyone and keeping up with the total pool of plan assets is not the administrator’s prerogative with these plans. Continue reading...
Can I Withdraw Money From My Defined Benefit Plan?
Most pensions will not allow in-service withdrawals but some will allow loans. While you are working for your employer, you typically may not withdraw money from your Defined Benefit Plan. The IRS permits plan loans if the plan administrator permits it. In-service withdrawals are possible after age 62, meaning money can get taken out before separation from service. If you leave your employer before retirement, the funds are usually kept in a Trust until you reach retirement age (or until a specified age at which you can start to receive the benefits). Continue reading...
What is IRS Publication 505, Tax Withholding and Estimated Tax?
IRS Link to Publication — Found Here This IRS guide gives taxpayers and businesses an idea of how to calculate the appropriate amount of withholding to do and how to continually estimate tax rate on an ongoing basis for an entire year. It is about 60 pages long and touches on many issues related to tax withholding. Tax withholding applies to payroll needs, self-employed reporting, as well as some retirement planning applications, among other things. Continue reading...
What is Investment Income?
Also referred to as passive income, investment income is money paid to an investor from the dividends, premiums sold, or sale of assets in their portfolio. Some investors treat it like a part-time job, such that there is nothing passive about it. In retirement, investors often receive income from bonds, preferred stock, and dividend-paying common shares. Income can be pulled from several kinds of investments, including real estate, and it is likely to be taxed at ordinary income tax rates. Continue reading...
What is FICA?
FICA (Federal Insurance Contributions Act) taxes are handled by the Social Security Administration, as they are payroll withholdings that go toward Social Security and Medicare funds. Most people will have half of their FICA paid by their employer, but self-employed people must pay it all on their own, which is called the “Self-Employment Tax.” FICA is a tax on employees and employers that funds the Social Security and Medicare programs of the United States. Continue reading...
What is Income Tax Payable?
Income Tax Payable is an account on a company’s ledger where they reserve amounts that will be used to pay the tax liability in the current quarter or year. This account tends to be separate from payroll taxes and sales taxes. This account will typically be empty at the end of the fiscal year. Corporations must pay income taxes based on their gross income, and the funds to pay them are held in the Income Tax Payable account on their company ledger. Continue reading...
What is Form 706: Estate Tax and Generation-Skipping Transfer Tax?
IRS Link to Form — Found Here The Form 706 is required not only if there is a tax implication for an estate, but also to claim exclusions. Each person has an exclusion of 5.49 Million as of 2017. For married couples, that goes double, such that heirs to an estate under $11 million probably will not owe any estate taxes. A surviving spouse should still report the inherited portion of the deceased spouse’s estate up to the exclusion amount, otherwise the exclusion will be lost. There are also lines for the lifetime gift exclusion amount and the generation skipping transfer tax. Continue reading...
What are Required Minimum Distributions?
RMDs are withdrawals that are mandatory for an individual to take from an IRA or 401(k) after the person has reached 70 ½. The government created laws that help and encourage people to save for their retirement by deferring taxes on the growth on certain qualified retirement investment accounts. On Traditional IRAs and 401(k) accounts, they are only waiting to get the tax revenue from distributions/withdrawals that are fully taxable as income. Continue reading...
How Do I Allocate My Assets in Retirement?
How you allocate your assets in retirement depends on your goals and objectives for the assets, and the amount of growth you need to reach them. Your asset allocation also depends on your age and risk tolerance, all of which need to be factored-in each year when allocating your portfolio. The very first step in deciding an asset allocation is to determine your total level of liquid assets, what your desired level of growth and/or income is over long stretches of time, and your tolerance for risk/volatility. Most investors need more growth over time than they think, and often times it results in investors under-allocating to stocks or other risk assets. Continue reading...