What Expense Do Many Retirees Fail to Plan For? Make Sure You Aren’t One of Them.
You probably think you know what you need to pay for in retirement. You may need housing if you have sold your longtime family home. Of course, you require food and transportation and utilities (and probably Netflix because you want to spend a lot of time with the grandkids, but you also want to unwind!).
But seniors consistently overlook one expense that can add up if you don’t plan for it, and that’s taxes.
When you hold a regular job, most employees withhold your tax payments in each paycheck. When you get to the end of the tax year, you may owe the government a little money, though many people get tax returns because they paid out too much.
For retirement, you receive no such automatic withdrawals. You need to figure out for yourself how much you need to pay in taxes, and if you don’t set aside money the whole year through, you could get a rude awakening come April.
Here are some tips for planning to pay taxes while you’re retired.
How Much Will You Need to Pay?
Before you start saving, you need to know how much you need to save. The Bureau of Labor Statistics Consumer Expenditure Survey says households headed by seniors have an annual income averaging around $55,000, and a little over a tenth of that will need to go to taxes.
A professional can help you calculate a more precise number, but no one wants to find out they suddenly owe $6,000.
The Exception to the Rule
Many people save for retirement using a tax-deferred account. But some people open Roth IRAs, which require you to pay taxes upfront. There is no right or wrong way to do it. You will end up paying taxes whichever option you choose.
Saving for Retirement Taxes
One way to avoid an unanticipated debt is to set aside money each month to pay for taxes, just as you would with a job. The only difference is that your employer isn’t passing this money on to the IRS. You are keeping it separate, and you won’t touch it until you pay your tax bill. You can try different tactics, such as:
· Setting up a checking account just for tax dollars. Transfer the money into the account each month.
· Putting money toward taxes before anything else each month. That way, you won’t get off track and fall behind, even though the money isn’t going anywhere until the new year.
· Making quarterly tax payments. People who perform gig or freelance work often make quarterly payments to the IRS to keep them current. You can do this as well, specifying your circumstances to explain why you need to make the payments.
Being aware of your tax responsibility is the first step toward avoiding a very steep bill when you turn in your taxes each year. A little preparation goes a long way. Remember, Jay can help you with this. Contact him to discuss your tax options.