If you are approaching retirement and have savings in a 457(b) retirement plan, you might wonder which taxes you’ll pay on withdrawals after age 70. This is important when it comes to retirement planning. Otherwise, it could be hard to accurately estimate your future income and tax liabilities. While 457(b) plans offer unique benefits when compared with other retirement accounts, they are not exempt from tax rules.
You can also consider working with a financial advisor who can help you structure withdrawals to minimize your tax burden.
457(b) Plans Explained
A 457(b) plan is a type of tax-advantaged retirement plan available to state and local government employees, as well as certain nonprofit employees. These plans allow workers to defer a portion of their salary into the account on a pre-tax basis. It grows tax-deferred until withdrawals begin.
Withdrawals
Withdrawals from a 457(b) plan can begin as soon as you separate from your employer, regardless of age. Other retirement accounts like 401(k)s and 403(b)s, typically impose early withdrawal penalties before age 59.5. However, once you start taking distributions, the IRS will tax those amounts are as ordinary income.
Required Minimum Distributions (RMDs)
Like other tax-deferred retirement plans, 457(b) plans are subject to required minimum distributions (RMDs). This means that starting at age 73 (for individuals who turn 72 after January 1, 2023), you must withdraw a minimum amount from your 457(b) account annually. The IRS calculates RMDs based on your age and account balance.
Taxes on 457 Withdrawals After Age 70
So, do you pay taxes on 457 withdrawals after age 70? Yes, you do. Withdrawals from a 457(b) plan after age 70 are subject to ordinary income tax. The IRS adds the amount you withdraw to your gross income for the year. It taxes your withdrawal at a rate based on your tax bracket. Only contributions made on an after-tax basis (rare in 457(b) plans) earn an exemption, or if your income falls below the standard deduction threshold. There are no additional tax penalties for withdrawals after age 70, but the standard income tax rules still apply.
When thinking about the tax on 457 withdrawals after age 70, there’s still more to consider. The following items may affect your tax liability and retirement income strategy. While the IRS taxes 457(b) distributions at the federal level, your state may also levy income taxes on withdrawals. Some states offer exclusions for certain types of retirement income, while others do not. For example, states like Florida and Texas do not tax income at all. This could make a big difference in your net retirement income. Check the tax rules in your state or speak with a tax consultant to understand how local governments will tax your distributions. The IRS will withhold a portion of your 457(b) withdrawal for taxes when you take a distribution. This is often 20% for lump-sum distributions, although you can elect a different withholding rate depending on your situation. If too much or too little is withheld, you’ll need to reconcile the difference when you file your tax return. Planning for withholding helps avoid a surprise tax bill or a penalty for underpayment. While 457(b) withdrawals after age 70 are taxed as ordinary income, proactive planning can help reduce the amount of taxes you owe. By managing your income streams strategically, you can potentially lower your marginal tax rate, preserve more of your retirement savings and improve your overall financial outlook in retirement. Here are several ways to minimize tax liability:
So, will you pay tax on 457 withdrawal after age 70? Yes, but, with the right strategy, you can manage those taxes and preserve more of your retirement income. Distributions are taxed as ordinary income and are subject to RMD rules starting at age 73. State and local taxes, withholding requirements, and broader retirement planning considerations can all affect your final tax bill. Photo credit: ©iStock.com/Drazen Zigic, ©iStock.com/vgajic, ©iStock.com/FatCamera Read the full article hereOther Considerations
State and Local Taxes
Mandatory Withholding
Retirement Planning and Income Management
Bottom Line
Retirement Planning Tips
Related Articles
