Watch out for Social Security and Medicare gotchas. Retirees who exceed certain income thresholds wind up owing federal tax on up to 85% of their Social Security benefits. And income above certain amounts can lead to higher premiums for Medicare Part B, or possibly a Medicare tax on investment income, as well. But if you’re lucky enough to have accounts from which you can draw tax-free distributions, such as a Roth IRA, you might be able to take a combination of pre-tax and after-tax withdrawals that keep your taxable income under those thresholds. Again, you’re best off consulting a professional for such complicated tax planning.
Awareness is the key. By understanding the complex nature of the retirement-tax landscape in advance, you can start making strategic investments now that can help lower tax bills later.
Chip Castille, Managing Director, is head of the BlackRock Global Retirement Strategy Group. You can find more of his posts here.