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Category: Taxes

  • Reaching the Age of 72: Retirement Milestones

    Reaching the Age of 72: Retirement Milestones

    At age 72, a key retirement milestone arrives: Required Minimum Distributions (RMDs). Understanding RMDs is crucial for maximizing retirement income and ensuring a secure financial future.

    Required Minimum Distributions (RMDs): Understanding the Basics

    What are RMDs?

    RMDs are mandatory withdrawals from retirement accounts, like 401(k)s and IRAs, that you must take annually starting at age 72. Your withdrawal amount is based on your account balance and life expectancy.

    Why are they required?

    RMDs are designed to ensure that retirement account balances don’t remain untouched indefinitely, allowing you to access your savings in retirement.

    The Importance of RMDs in Retirement Planning

    Tax implications

    RMDs are taxed as ordinary income, so planning for their impact is essential.

    Income generation

    RMDs can provide a steady source of income in retirement, supplementing Social Security and pensions.

    Retirement planning

    Understanding and incorporating RMDs into your retirement plan ensures that you’re maximizing your savings and meeting your financial goals.

    Strategies for Managing RMDs and Maximizing Retirement Assets

    Tax-efficient withdrawal

    Consider withdrawing from accounts with lower tax rates first to minimize your tax burden.

    Charitable giving

    Donate to charity directly from your IRA, which can reduce your taxable RMD and potentially provide tax benefits.

    Retirement income planning

    Work with a financial advisor to develop a comprehensive plan that considers RMDs and other income sources to create a sustainable retirement income stream.

  • IRS seven tax brackets and federal income tax rates

     

    The IRS uses seven tax brackets to calculate your tax bill based on income and filing status. As your income rises, you may move into a higher tax bracket, which can increase the amount you owe in taxes.

     

    It’s important to note that you do not pay the same tax rate on every dollar of income. Instead, your income is divided into thresholds. As you exceed each threshold, a portion of your income is taxed at the higher rate associated with the new bracket.

     

    Your marginal tax rate is the rate applied to your highest dollar of income, while your effective tax rate is the total percentage of your income that you pay in taxes.

     

    For example, assume a hypothetical taxpayer who is married and has $100,000 of joint income in 2024 is claiming the standard deduction of $29,200.

     

    Without considering other income, adjustments to income, or other deductions, their taxable income would be $70,800. That is $100,000 joint income minus $29,200 for the standard deduction. They would owe the following in federal income taxes:

     

    10% of the first $23,200 income is $2,320 tax.

    12% of the next portion of $71,100 and up to $94,300 is $8,532 tax.

    22% of the remaining portion of $5,700 and up to $201,050 is $1,254.

    Add $2,320 plus $8,532 plus $1,254, they owe $11,926 of total taxes on $100,000 of income.

    Their effective tax rate is then $11,926 divided by $100,000 comes to 11.9%.

     

     

    The Internal Revenue Service adjusts federal income tax brackets each year for inflation. Below are the 2025 tax brackets to help estimate your tax obligation based on income and filing status.

     

    Notice, that for married couples filing jointly, the standard deduction rises to $30,000 in 2025, an increase of $800 from tax year 2024.