A. You can imagine there is a ‘Tax Torpedo’ coming towards your retirement ship and aims to sink it.
Why? Because for any retirees, what matters is after-tax income. But if you don't plan your after-tax retirement income well, you could easily find yourself paying over half of any incremental retirement income in taxes.
Retirement Income Sources
For most people, there are two major sources for retirement income - social security and IRA withdrawals.
First, the IRA income is taxed as ordinary income.
Second, once your IRA income exceeds a certain amount, the Social Security benefit will also be taxed.
This is so called ‘Combined Income’ and is calculated according to an IRS formula. It depends on the mix of the taxable money and the Social Security benefit. If the Combined Income is below a threshold amount, there’s no tax on your benefit, but above the threshold, your Social Security benefit will be subject to taxation.
That will be a big hit to your income, because if your combined income exceeds certain threshold, up to 85% of your benefit will be taxed!
Most retirees don’t know how to calculate their Combined Income and are hit by the ‘Tax Torpedo’.
We will use an example to illustrate the Tax Torpedo tomorrow.