Avoiding The Tax Traps

Every person would like to be able to come up with an excellent retirement income plan for their golden years. However, most individuals find that they are unable to escape the annoying and debilitating effects of taxation pitfalls. With this in mind, it would be a proactive idea to learn about what are the common taxation errors that one can avoid with a little planning.

Understand the terms

As a person who has been able to save a significant amount of wealth, it must be of utmost importance for you to be able to know the difference of growth, income and cash flow. When we are talking about "cash flow", this means the the after-tax cash that you will have that will meet your needs.

Income is what you will have to pay annual taxes on and for the last one which is growth, it is what you will be getting from your portfolio for you to be able to ensure that you will have enough financial savings for you to last your lifetime.

One important note to consider is that you must be able to factor in the amount of inflation that will happen in the future for these type of factors to be assessed properly.

When you are in the stage of your life that you are already planning to retire, your goal is to be able to achieve as much cash flow possible while, on the other hand, paying the least possible amount of money in income taxes which will eventually leave you enough in your portfolio for you to be able to let it grow at a rate that will be able to keep up with inflation.

Take the required minimum distributions

You should be always conscious of whether you have any traditional IRAs or qualified plans that you could start taking annual distributions out on. If you do have these types of plans, you should be taking annual distributions by the time that you reach the age of 70. If you are unable to do that you, could be penalized for failing to do so. Penalties for these types of occurrences can be as high as fifty percent of the required distribution.

Study up on the impacts of tax on social security

You should have a good grasp on how your tax affects your social security. If your taxable income plus half of your social security elevates your income above the $25,000 dollar mark for single filers, this can lead part or all of your social security to become taxable as well. This is when you need to know about how you should manage your cash flow and income. If you are able to plan well, you can either eliminate this problem altogether or lessen the impact to you.

The bottom line is, you should not fall victim to taxation traps simply because you did not ask around or you were not aware of some things regarding your income, cash flow or portfolio. Try to read up on tax literature and see if you are able to save up by changing a few things.

 

Posted by Ardent Editor on May 17 2007 in Money 101

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