Income taxes are applicable even without your day job.
You may elect not work in retirement.
You may simply enjoy families, hobbies, and volunteering.
Accordingly, you will not earn a paycheck.
According to a recent Market Watch article titled “How 401(k) savers can avoid a nasty surprise come retirement,” you will still owe income taxes.
If you have a traditional IRA or 401(k), you will owe taxes on withdrawals regardless whether they are part of your Required Minimum Distribution.
Does this mean you should not make contributions to your retirement plan while working?
You do received a tax benefit when the contributions are made.
The contributions are not "tax-free," however.
Rather taxes are deferred to the time you take withdrawals from the account.
When planning for retirement and calculating what you need, be sure you take the tax consequences into account.
For example, if you have $1 million in an account, you may only have $700,000 after taxes.
No one knows or can predict future tax rates.
As a baseline plan on 20 percent at the federal level and 3 to 10 percent at the state level.
To maximize the money in these accounts, be sure to delay withdrawals until after you turn 59½.
You will pay a penalty on any withdraw taken before this age.
What a waste.
If you plan to work and take withdrawals, this could put you in a higher tax bracket and require you pay more money in taxes or Medicare premiums.
If you plan to work in your 60s and 70s, delay withdrawals as long as possible.
If you can wait until you are 70½, you likely will maximize your retirement fund accumulations as this is the age when you must begin taking your Required Minimum Distributions.
A little strategy can go a long way in maximizing your savings and minimizing your tax liability.
Reference: Market Watch (June 3, 2019) “How 401(k) savers can avoid a nasty surprise come retirement”