Retirement should require less income than was needed during working years because you no longer have to pay FICA taxes or will be diverting money to retirement accounts. In addition, retirement income is often taxed at a lower rate. Note, however, that social security benefit income can be taxed. Traditional IRAs and 401(k)s are taxed as ordinary income, and capital gains and dividends are also taxed. Roth account withdrawals are tax-free, but they don’t give the same tax deduction as 401(k)s. Ultimately, to maintain your pre-retirement standard of living, you’ll need about 70-80% of the income you earned during working years.
Key Takeaways:
- The amount of tax that may or may not be applied to your social security depends entirely upon your other income sources.
- Tax deferred accounts are generally taxed at the normal rate for other types of income.
- This means that your 401K plan will not be taxed at a higher level than 35%.
“To see how all this works, let’s consider a typical situation where a single person earns $80,000 a year and saves 10% of it for retirement. After deducting retirement contributions, FICA taxes, and income taxes, that typically leaves between $50,000 and $60,000 of spending money.”
Read more: https://www.fool.com/retirement/retirement-step-9-how-to-need-less-cash.aspx
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