Retirement taxes

vscummins

Well-known Member
My mom is retiring soon what is the way to pay the least amount of taxes she's paid on it when she put it in now she has or pay again when she takes it out will she have to pay for it again as income next year?
 
Retirement earnings (401K) are usually put in tax deferred. The theory is that when you are withdrawing it, you will be taxed less because you will have less. Have her hire a good tax guy and she will pay only what she should be paying. At least that is my situation.
 
Theoretically she should only have to pay income tax on the "gains", but I don't understand how this is all kept straight for instance when each year the investor has had to pay income tax on "dividends". With 401k's the investor has to pay social security tax on the money going in, but not income tax. I'm in the same situation as your mother, old enough to start drawing out. I feel like it's a shell game and the investor is not the one shuffling the shells. Also a big concern is what will inflation do to the money invested all those years?
 
Well, to quote John T once again...this is a pretty serious and potentially complex area and asking Billy Bob and Bubba on a tractor forum is really not a good plan. Lots of opinions, not many of them backed up with credentials or, sometimes worse, limited credentials. You are not specific about the SOURCE of the cash inflow. The source and the amount from all sources will determine tax. The one interesting thing you said was that "she paid tax on it going in". In general, you only pay tax on income one time. So if her money is in (after tax) savings she will not pay tax again. Deferred plans are generally taxable coming out because you did not pay income taxes on them when they went in. Some plans will have a component that was put in after tax and this will be separated out by the fiduciary when they issue the tax statements so that she does not pay tax on them again.

Now the one glaring example of double taxation can be social security income. You definitely paid income tax on the money that went to social security. In some situations, and I am not going to work examples or give you specifics, social security can be taxable. The max they tax is 85% of it and it generally occurs when income reaches $30-40K range...again, speaking in generalities. This is real good time to invest in a good local CPA who, like me, has a lot of clients retired and living the good life because someone makes sure they have all the bases covered. All these sources of income give you the ability to have tax withheld from your payments. DO NOT let mom retire without talking to someone about this, getting a plan set up to keep her from owing big money with her return. Hope this helps. Once you talk to a local guy, if you are not understanding something. Drop me an email and maybe I can clear the water a little.

Dave H, CPA
 
Everyone needs to have a good finical adviser long before they retire. Everyone's situation is different, seek professional advice. Everything else is hear say. I started planning my retirement the day I graduated college. Been retired for 11 years now.
 
That's a complex question, as the others say.

Are we talking a pile of investment money, a pile of land, a pile of iras, a pile of machinery, a pile of livestock and grain?

Any of the above is different, hard to say with what info you provided.

A good CPA tax lawyer dude often is worth the insane hourly fee they charge for such advise.....

Paul
 
Whether it's a retirement plan, 401k or IRA, it's pretty straightforward: if your contributions were taxed when you put them in, you don't pay tax on the amount of AFTER-TAX contributions. But anything above the after-tax contributions, including any pre-tax contributions, is subject to tax.

I assume none of her retirement is in a Roth IRA; the rules for a Roth IRA are different.

If we are talking about a defined benefit pension plan, she will probably have multiple options for how to take her pension. Right now, the interest rate used to calculate lump-sum distributions is quite low (~1 percent). The lower the interest rate the higher a lump-sum distribution will be relative to an annuity. For this reason she should consider taking a lump sump (or the shortest possible period certain distribution) and roll her taxable distributions into an IRA. That way she doesn't pay taxes until she actually draws the money out of the IRA.
 
I totally agree and this is how I set up my retirement. Getting the lump sum puts YOU in control of YOUR money and you have access to it as you need it, a big chunk or none at all. If you put it in a safe place you don't have to worry about company problems and potential unlawful raidings on company retirement funds that are supposed to be separate money and safe.............

Pay attention to the tax and SS when looking at income. If you have no additional income it's a no brainer. You don't even have to file. But as you add outside income, aka IRA distributions to your 1040, SS sticks it's head up and out come the taxes on it over the minimum limit. Amount depends on how much additional income you include.

The bad thing about additional income and SS is that it can amount to what appears to be double taxation. Best thing for you to do is go to IRS.gov and in the 1040 instructions PDF pull up a SS worksheet. It's all there in glorious black and white. You can play with the numbers and see how much IRA you can take out and what's your tax burden. It's NOT a linear scale.

Oh, one more thing. If you are the thrill seeker and decide to gamble your life's savings, aka play the market of whatever type, just remember, if you loose 50% of your savings, you have to earn 100% just to get back where you were. Now where can you get that kind of return........food for thought.

Happy Retirement. I have enjoyed mine since Jan1, 2005.

Mark
 
Depends on what state she lives in. Some states, like Michigan are taxing pensions as income - depending on how much it is and when the person actually retired.
 
It would take one heck of a offer to get me to cash out a pension. Most companies payouts aren't enough to make it worthwhile, IMHO.
 
I'm not sure what you mean by "cash out", spook. If you're talking about a withdrawal of your contributions plus interest, that's totally different than taking your pension in a lump-sum distribution. A lump sum distribution just means you get the cash up front it would cost to purchase an annuity equivalent to your pension benefit. It's really the same money.
 
(quoted from post at 03:54:48 02/01/15) I'm not sure what you mean by "cash out", spook. If you're talking about a withdrawal of your contributions plus interest, that's totally different than taking your pension in a lump-sum distribution. A lump sum distribution just means you get the cash up front it would cost to purchase an annuity equivalent to your pension benefit. It's really the same money.

I know that the Ford Motor Company offered pension buyouts a couple years ago. The acceptance rate was less than 1%. Financial advisors said the only folks who it would make sense for would be the terminally ill, with no heirs. Basically Ford was not offering enough money to buy that annuity, it was definitely in the companies interest to pay less ( I think it was like 25% less ).
 

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