Retirement doesn't exempt you from paying taxes and it's smart to factor in potential taxes as you make your retirement plans. Most of the types of taxes that affect retirees are those that vary by state and locality. Through researching ahead of time, you can plan to move to an area that takes a smaller tax bite out of your retirement savings.
Though you're no longer working, you do still have income in the form of Social Security payments along with any distributions from your retirement accounts. The federal government will tax your Social Security benefits if half of those benefits plus other sources of retirement income is greater than $25,000 if filing single and $32,000 if married filing jointly. Some states do not have an income tax or exempt the income from sources such as Social Security or a government pension, while others do tax this amount. Distributions you take from retirement savings, such as 401k plans and individual retirement accounts, are taxed at your normal income tax rate.
Roth IRA Distributions
Any money you contributed to a Roth IRA was already taxed, so when you take distributions from this account, they will not count toward your taxable income.
Cities and counties charge property taxes on any property that you own. If you're living in a house that you bought, you will have to pay these taxes, even though you may have paid off the mortgage. The amount charged is based on the home's value. Making upgrades to your home may affect the rate of property tax that you have to pay. You can reduce or eliminate property taxes by downsizing your home and moving specifically to an area with lower property taxes or by living in an apartment or retirement community.
Most states also charge sales tax on certain purchases. Food is typically exempt from this type of tax, though other items like clothing may also be exempt. In some cases, not only will you have to pay a state sales tax, but you may also have a city or country sales tax, which can start to reach 10 percent. If you're concerned about this, look for areas with lower sales taxes.
- Jupiterimages/Photos.com/Getty Images