Most people who retire do so within a budget. Like numerous others across the country, many Massachusetts residents begin planning for their retirement as soon as they can, but that could be at different stages of their lives, so the budgets will be different. One mistake many people make when doing their planning is how the IRS will treat those precious funds.
Unless a Massachusetts resident has a Roth IRA, the IRS will take taxes out when he or she takes a distribution. Of course, the taxes are taken out upfront with a Roth IRA, but the benefit is that taxes do not come out when the individual needs the money as income — during retirement. Any other kind of retirement plan requires payment of taxes upon withdrawal.
Even Social Security benefits could be taxable depending on the total annual income. Retirees also need to make sure they do not end up in a higher tax bracket due to the amount of the withdrawals they take from their retirement accounts. Those brackets are the same whether the income comes from employment, investments or retirement.
Planning for retirement involves much more than putting money aside. It is necessary to also take into the consideration how the IRS will treat the withdrawals made from a retirement account. Tax brackets and income taxes are more than likely not the only possibilities to address. Working with an experienced tax attorney could help make sure there is more money available in the budget in retirement by limited tax liability.