Many taxpayers are unaware of how to calculate the amount of tax they will pay in retirement, when they begin withdrawing money from their retirement savings and no longer are relying on a regular paycheck. However, it is fairly simple to figure out roughly how much money you will owe Uncle Sam when you are finished working. Knowing how to calculate your taxes in retirement can prevent you from getting an unpleasant surprise when you file your taxes at year-end.
Step 1
Determine all of the income you will be taking from retirement savings accounts in the coming year. Include income from annuities, pensions and IRA distributions. Basically, include any income you will report on your Form 1099-R. Do not include distributions from Roth IRA accounts.
Step 2
Determine the total value of the rest of your income, including interest, income from jobs, dividends and capital gains. Do not include any income that is not taxable.
Step 3
Figure out how much tax you would be paying on your regular (non-retirement) income if it were the only income you would be receiving for the year. Look at your previous year's tax bracket to help you determine how much you would pay on this year's income.
Step 4
Figure out how much tax you would pay on your total income, including your retirement income. Use the previous year's tax rates to calculate how much you would pay for the coming year. Prepare a fake tax form in where you calculate your total taxes. This will help you estimate your taxes.
Step 5
Compare the two numbers you came up with in step 3 and step 4. Take an average of the two to get an approximation of the amount that you will have to pay for your retirement tax.
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