Typically, you get a tax deduction when you put money in an IRA (individual retirement account). It grows tax-deferred and when you withdraw those dollars, they are taxed. However, there are certain scenarios where those withdrawals are not taxed. Karl Eggerss explains on CBS.
Sharon Ko: We’re going over one money smart strategy for retirement. Withdraw money from your IRA to reduce taxes you have to pay. An IRA is an individual retirement account. It allows you to save pre tax income. You will have to pay taxes when you take out that money at a future tax rate. The benefit, you may end up paying less taxes today since your taxable income could be less in the future. As financial Karl Eggerss explains next, when you are ready to withdraw money out of your IRA, this is how you compare it up with an available tax deduction to get a tax break.
Karl Eggerss: The idea here is that every couple gets a tax deduction, a standard tax deduction, of $27,400 if you’re over age 65. That’s due to the tax law changes a couple of years ago. So you could make up to $27,400 with no taxes. So let’s say for example, a couple that is living off of social security and it’s not quite up to that $27,400 level, you can actually take a little out of your IRA and not pay any taxes on it because you’re getting that standard deduction. So the idea right now is to really think about what is your income going to be, not only in 2020, 2021, but to plan out for the next several years. In addition, we know that the tax laws could change if the administration changes. And if that’s the case, it will require more financial planning to really determine what your cash flows are going to be and if you can take advantage of brackets in 2021 before maybe a tax law change would go into effect.