7  Taxes Myths

⚠️ This book is generated by AI, the content may not be 100% accurate.

7.1 Income Taxes

📖 Myths about how much taxes you will pay in retirement.

7.1.1 item In retirement, you will automatically be in a lower tax bracket and pay less in taxes.

  • better_alternative_belief:
    • Your tax bracket in retirement will depend on the sources and amount of your income.
  • explanation:
    • While it’s true that some sources of retirement income, like Social Security, are tax-free, others, like withdrawals from traditional IRAs and 401(k)s, are taxed as ordinary income. So, if you have a significant amount of retirement income, you could end up in a higher tax bracket than you were when you were working.

7.1.2 item You can withdraw as much money as you want from your retirement accounts without paying taxes.

  • better_alternative_belief:
    • Withdrawals from traditional retirement accounts, like IRAs and 401(k)s, are taxed as ordinary income.
  • explanation:
    • This means that if you withdraw $10,000 from your traditional IRA, you will have to pay income tax on that$10,000. The amount of tax you pay will depend on your tax bracket.

7.1.3 item You can’t contribute to a Roth IRA after you retire.

  • better_alternative_belief:
    • There is no age limit for contributing to a Roth IRA.
  • explanation:
    • As long as you have earned income, you can contribute to a Roth IRA. This means that you can continue to contribute to a Roth IRA even after you retire.

7.1.4 item You have to claim Social Security benefits the month you turn 62.

  • better_alternative_belief:
    • You can claim Social Security benefits anytime between the age of 62 and 70.
  • explanation:
    • The age at which you claim Social Security benefits will affect the amount of your monthly benefit. If you claim benefits early, your monthly benefit will be reduced. If you claim benefits later, your monthly benefit will be increased.

7.1.5 item Medicare Part B premiums are free.

  • better_alternative_belief:
    • There is a monthly premium for Medicare Part B.
  • explanation:
    • The monthly premium for Medicare Part B is deducted from your Social Security benefits. The amount of the premium depends on your income.

7.2 RMDs

📖 Myths about required minimum distributions (RMDs) from retirement accounts.

7.2.1 item You can withdraw as much money as you want from your retirement account before age 59½ without paying a penalty.

  • better_alternative_belief:
    • If you withdraw money from a traditional IRA or 401(k) before age 59½, you will have to pay a 10% early withdrawal penalty in addition to income taxes.
  • explanation:
    • The 10% early withdrawal penalty is designed to encourage people to save for retirement and not withdraw their money early. The penalty is applied to the amount of money you withdraw, not just the earnings.

7.2.2 item You have to start taking RMDs from your retirement account at age 70½.

  • better_alternative_belief:
    • The age at which you must start taking RMDs from your retirement account is 72.
  • explanation:
    • The SECURE Act of 2019 changed the age at which you must start taking RMDs from 70½ to 72. This change was made to give people more time to save for retirement.

7.2.3 item You can avoid taking RMDs by rolling your retirement account over to a Roth IRA.

  • better_alternative_belief:
    • You cannot avoid taking RMDs by rolling your retirement account over to a Roth IRA.
  • explanation:
    • Roth IRAs have their own set of rules and regulations, and you must still take RMDs from your Roth IRA once you reach age 72.

7.2.4 item You can take RMDs from your retirement account in any amount you want.

  • better_alternative_belief:
    • The amount of money you must withdraw from your retirement account each year is based on your account balance and your life expectancy.
  • explanation:
    • The IRS has a formula that you can use to calculate your RMD. The formula takes into account your age, your account balance, and the interest rate.

7.2.5 item You can skip taking RMDs if you don’t need the money.

  • better_alternative_belief:
    • You must take RMDs from your retirement account each year, even if you don’t need the money.
  • explanation:
    • The IRS will impose a 50% penalty on the amount of money that you should have withdrawn but did not.

7.3 Social Security Taxes

📖 Myths about how Social Security taxes will affect your retirement income.

7.3.1 item Social Security taxes are a waste of money.

  • better_alternative_belief:
    • Social Security is a way to save for retirement and supplement your income.
  • explanation:
    • Social Security is a valuable retirement savings tool that provides a guaranteed income stream in retirement. The taxes you pay into Social Security are invested and grow over time, and the benefits you receive are partially based on the amount you contribute.

7.3.2 item I’ll never get back the money I pay into Social Security.

  • better_alternative_belief:
    • You will likely get back more money from Social Security than you pay in taxes.
  • explanation:
    • The average person gets back more from Social Security than they pay in taxes over their lifetime. The program is funded by a combination of payroll taxes and interest on investments, and the benefits are designed to provide a basic level of income in retirement.

7.3.3 item I can’t collect Social Security benefits until I’m 65.

  • better_alternative_belief:
    • You can start collecting Social Security benefits as early as age 62, but your benefits will be reduced if you do.
  • explanation:
    • The full retirement age for Social Security is 65. You can start collecting benefits as early as age 62, but your benefits will be reduced by up to 30%.

7.3.4 item I’ll lose my Social Security benefits if I keep working.

  • better_alternative_belief:
    • You can continue to collect Social Security benefits while you’re working.
  • explanation:
    • You can continue to collect Social Security benefits while you’re working, but your benefits may be reduced if you earn too much money. The amount of your reduction depends on your age and the amount of your earnings.

7.3.5 item Social Security is going broke.

  • better_alternative_belief:
    • While Social Security does face some challenges, the program is not going broke.
  • explanation:
    • Social Security is funded by a combination of payroll taxes and interest on investments. The program’s trust fund is expected to be depleted by 2033, but the government has options to address the shortfall. These options include raising the Social Security tax rate, increasing the retirement age, or cutting benefits.

7.4 State and Local Taxes

📖 Myths about how state and local taxes will affect your retirement income.

7.4.1 item If you move to a state with no income tax, you will not pay any taxes on your retirement income.

  • better_alternative_belief:
    • Even if you live in a state with no income tax, you may still owe federal income taxes on your retirement income.
  • explanation:
    • While some states do not have an income tax, the federal government still taxes retirement income. This means that you will need to pay federal income taxes on your retirement income, even if you live in a state with no income tax.

7.4.2 item You can withdraw money from your retirement accounts without paying taxes if you are over 59 1/2.

  • better_alternative_belief:
    • You can withdraw money from your retirement accounts without paying a 10% early withdrawal penalty if you are over 59 1/2, but you will still owe income taxes on the money you withdraw.
  • explanation:
    • The 10% early withdrawal penalty is only waived if you are over 59 1/2. However, you will still owe income taxes on the money you withdraw from your retirement accounts, regardless of your age.

7.4.3 item Your state income tax rate will be the same in retirement as it is when you are working.

  • better_alternative_belief:
    • Your state income tax rate may be different in retirement than it is when you are working.
  • explanation:
    • Your state income tax rate may change in retirement, depending on your income and other factors. For example, if you have a lower income in retirement, you may be in a lower tax bracket and pay a lower tax rate.

7.4.4 item You can avoid paying state income taxes on your retirement income by moving to a state with a low cost of living.

  • better_alternative_belief:
    • Moving to a state with a low cost of living may not be enough to avoid paying state income taxes on your retirement income.
  • explanation:
    • Even if you move to a state with a low cost of living, you may still owe state income taxes on your retirement income if you have a high enough income. This is because most states have a graduated income tax system, which means that the higher your income, the higher your tax rate.

7.4.5 item You can deduct state income taxes on your federal income tax return.

  • better_alternative_belief:
    • You can deduct state income taxes on your federal income tax return, but only if you itemize your deductions.
  • explanation:
    • The standard deduction is a set amount that you can deduct from your income before you calculate your taxable income. If you itemize your deductions, you can deduct state income taxes, but only if the total amount of your itemized deductions is greater than the standard deduction.

7.5 Tax-Free Retirement

📖 Myths about the possibility of having a completely tax-free retirement.

7.5.1 item You can avoid all taxes in retirement if you plan carefully.

  • better_alternative_belief:
    • It is possible to minimize taxes in retirement, but it is unlikely that you will be able to avoid them altogether.
  • explanation:
    • There are a number of taxes that you may be subject to in retirement, including income税, capital gains税, and property税. The amount of税 you owe will depend on your income, investments, and other factors.

7.5.2 item You should withdraw all of your money from your retirement accounts as soon as you retire.

  • better_alternative_belief:
    • You should only withdraw the money you need from your retirement accounts each year.
  • explanation:
    • Withdrawing too much money from your retirement accounts can lead to higher taxes and penalties. It is important to create a withdrawal plan that will allow you to live comfortably in retirement without running out of money.

7.5.3 item You can’t contribute to a Roth IRA if you’re over 50.

  • better_alternative_belief:
    • You can contribute to a Roth IRA regardless of your age, as long as you meet the income limits.
  • explanation:
    • The Roth IRA is a tax-advantaged retirement account that allows you to withdraw money tax-free in retirement. There are income limits for contributing to a Roth IRA, but they are not based on age.

7.5.4 item You have to take required minimum distributions from your retirement accounts starting at age 70½.

  • better_alternative_belief:
    • You have to take required minimum distributions from your retirement accounts starting at age 72.
  • explanation:
    • The age at which you have to take required minimum distributions from your retirement accounts was changed from 70½ to 72 in 2020.

7.5.5 item You can’t make catch-up contributions to your retirement accounts if you’re over 50.

  • better_alternative_belief:
    • You can make catch-up contributions to your retirement accounts if you’re over 50.
  • explanation:
    • Catch-up contributions are additional contributions that you can make to your retirement accounts if you’re over 50. These contributions can help you to save more money for retirement.