3 Taxes That Shrink (or Disappear) When You Retire
If you’re getting ready to retire and think you’ll finally leave income taxes behind, then there’s good news and bad news. The bad news is, you’ll probably still have to pay income taxes. The good news is, your tax obligation will likely go down.
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As SmartAsset reported, you will “never age out” of paying taxes, no matter how old you are or your income status. For example, if you take distributions from your 401(k), traditional IRA or certain other retirement savings, you’ll have to pay taxes on those withdrawals as long as they last.
If you’re a Social Security recipient, you could owe personal income taxes on your benefits if you also earn outside income that puts you above a certain income level. You must pay taxes on your Social Security benefits if you file a federal tax return as an individual and your combined income exceeds $25,000 a year. If you file a joint return, you must pay taxes if you and your spouse have a combined income of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.
However, there are certain taxes that shrink or disappear when you retire. Here’s a look at three of them.
Social Security and Medicare Payroll Taxes
Technically, being “retired” means you no longer work for pay, although many so-called retirees still work part-time jobs or side gigs. If you have left the workforce altogether and don’t earn a paycheck, then the one tax that disappears altogether is the FICA tax deducted from your check that goes toward funding Social Security and Medicare. The FICA tax rate is 7.65%, with 6.2% going toward Social Security tax and 1.45% going toward Medicare tax.
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Overall Income Tax Liability
Once you hit age 65, your standard deduction goes up and your income tax liability goes down. When filing single, the standard deduction for people 65 and older is $1,650 higher than for those under 65, according to Intuit TurboTax. When filing jointly, the standard deduction is $1,300 higher if one spouse is 65 or older and $2,600 higher if both spouses are 65 or older.
Roth IRA Taxes
Because you pay taxes on Roth IRAs when you make contributions to the accounts, those taxes go away when you begin making withdrawals in retirement. Because these withdrawals won’t push up your taxable income, you can take out extra money from your Roth accounts in years when you already have significant taxable income.
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This article originally appeared on GOBankingRates.com: 3 Taxes That Shrink (or Disappear) When You Retire
