What Retirement Co$ts: Taxes
by Ron

Many people when budgeting for retirement don’t think about taxes, or so studies say.  Each situation is really different here, but some basics apply to most.

In Kansas, 85% of Social Security income is taxed by both federal and state authorities.  The average SS payment nationally is about $15000 per year, so some in Kansas receiving that amount pays taxes on $12,750. 

There is help with property taxes for those with lower incomes, but for most there’ll be a bill for both real estate and also for one’s automobiles and other vehicles.   We know what those costs are before we retire: they just keep on going after retirement.

The same is true for sales taxes, gasoline taxes and so on. 

For those who have had money in tax deferred accounts like regular IRA’s or 401k’s or similar things, every dollar that comes out of those is a taxable  dollar.  So that’s good to remember.

Pension and annuity income taxes vary from one state to another, but it’s good to find out ahead of time what those taxes, if any, will be. 
Sara and I will draw annuities  from our  funds in TIAA/CREF, and those will be subject to automatic 20% federal tax withholding.  Check your situation, as this is both good (tax money is being sent in) and bad (your take home check will be lower than you might have expected).     

The IRS wants to make sure we all pay a good bit of tax on those tax-deferred savings.  So, in the year one turns 70½ comes the RMD:  Required Minimum Distribution.  Based on the amount you have in those tax-deferred accounts at the end of each tax year,  you’ll be issued an RMD amount (most IRA’s and other plans will tell you what that is) and then that is divided by the number 27 in the first year after 70½, 26 in the second, and so on.   So we must take that amount out of tax-deferred savings and pay income taxes on it.

The IRS does not care what we do with our RMD amount, so we can turn around and put it into some kind of savings plan.  They just want the taxes paid on it, thank you very much.

States vary widely on what is taxed in retirement.  A few states have no state income tax on anybody, for instance.  Pension income is treated quite differently from one state to another for income tax purposes. 

If one has no tax deferred savings, there is no RMD.  There are assistance programs for low income persons with Medicare costs and with things like property taxes.  

But if you were a diligent saver into the company plan or whatever, you’ll pay the piper beginning at 70½, if not before.

There are things to monitor in retirement.  In Kansas they have cut income taxes a lot for state taxpayers.  That just might mean higher property taxes down the road, since less money from the state for education will mean local districts must raise revenue via property tax.

Various government initiatives are tied to raising sales taxes.  Most of us don’t keep close track of what we pay in sales tax, but a ½ cent increase here and there will add up over time. 

Those will less money in retirement might not need to worry about income taxes, but homeowners will need to pay property tax and we all pay the same sales tax rate regardless of income.

Some states do not tax food or medicine.  Kansas does. 

Taxes, one way or another, need to be estimated when planning retirement costs.  Good luck!