Consider taxes in retirement planning

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Does your retirement plan consider tax issues? I’m Barbara Whelehan with the Personal Finance Minute.

You probably know that you’ll have to pay ordinary income taxes on your traditional IRA or 401(k) when it’s time to take the money out. After all, you never did pay taxes on the workplace plan or deductible IRA contributions.

But did you know that retirees could pay tax on up to 85 percent of their Social Security benefits? If you’re relying exclusively on Social Security for retirement income, you likely don’t have to worry about these taxes. But if you’re getting extra income from a job, an IRA or pension plan, or investment income — even from tax-exempt securities — you may face taxes if they exceed a certain limit.

Here’s how it works: If half of your Social Security benefits plus your added retirement income add up to more than $34,000 in 2012, you could face taxes on your Social Security. For married couples filing jointly, the income cap is $44,000 before these taxes kick in.

So when it’s time to retire, be sure to consider taxes as part of the income planning process. For more on this and other personal finance information, visit I’m Barbara Whelehan.

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Barbara Whelehan
Contributing writer
Barbara Whelehan is a contributing writer for Bankrate. Barbara writes about a range of subjects, including homebuying, real estate, retirement, taxes and banking.