How is your retirement income taxed?
Once yoivre retired, you will likely need to draw on several types of income for your living expenses. You'll need to know where these funds are coming from and how much you can count on, but you should also be aware of how this money is taxed - because this knowledge can help you plan and budget for your retirement years.
Here's the basic tax information on some key sources of retirement income: ·
·Annuities -Many investors use annuities to supplement their retirement income. An annuity is essentially a contract between you and an insurance company in which the insurer pays you an income stream for a given number of years, or for life, in exchange for the premiums you paid. You typically purchase a "qualified" annuity with pretax dollars, possibly within a traditional IRA or 401 (k). so your premiums may be deductible, and your earnings can grow tax deferred. Once you start taking payouts, the entire amount - your contributions and earnings - are taxable at your individual tax rate. On the other hand, you purchase "non-qualified" annuities with after-tax dollars, so your premiums aren't deductible, but just like qualified annuities, your earnings grow on a taxdeferred basis. When you take payments, you won't pay taxes on the principal amounts you invested but the earnings will be taxed as ordinary income.
We've looked at some general mles governing different sources of income, but you should consult your tax professional about your specific situation. Ultimately, factors such as your goals, lifestyle and time horizon should drive the decisions you make for your retirement income. Nonetheless, you may want to look for ways to control the taxes that result from your various income pools. And the more you know about how your income is taxed, the fewer unpleasant surprises you may experience.
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