You Didn’t Take Taxes Into Consideration
Taxes, taxes, taxes! Can anyone forget about them? Apparently, some can and are, in fact, unaware of how much big of a bite taxes will take out of their retirement income. For instance, every time you take money out of your 401(k) or IRA, you’ll have to pay certain taxes. If let’s say, you need $50,000 a year to cover expenses, you’ll have to take out more than that to cover the tax bill.
What To Do
A 401(k) is a tax-deferred account because workers can save and invest a piece of their paycheck before taxes are taken out. You are offered a tax-break on money but you still have to pay taxes on withdrawals at your regular income-tax rate. In the case of tax-free Roth IRAs, you are allowed to make withdrawals in retirement without paying any tax for that money.
“You can reduce the tax bite on your retirement income by saving in a combination of taxable, tax-deferred and tax-free accounts,” said Mark Wilson, president of MILE Wealth Management in Irvine, Calif. For instance, an account with a brokerage company where you invest in stocks, bonds or mutual funds, is considered a taxable account.
If you have a traditional IRA and want a source of tax-free income, consider converting it to Roth IRA, Wilson advised.
