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    Welcome to Reilly Painting and Contracting, "The Home Mechanics," and Reilly Properties. We are your Cleveland home contractors who specialize in major home design projects and remodels, and minor home repairs. We also provide house rentals throughout Cleveland, Ohio.

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  • Overestimating Your Taxes = Delayed Retirement

    [caption id="attachment_2959" align="alignleft" width="363" caption="Overestimating Your Taxes"]Retirement[/caption]


    Taxes have a huge impact on your retirement plans. Overestimating your taxes and spending more than you can afford is like the shark from Jaws...and your retirement is getting safely back to shore. Liz Davidson discusses more in her Forbes article "Could Taxes Derail Your Retirement?"

    We recently received a question from a woman who was trying to see if she could afford to take an early retirement package but wasn’t sure how much of her income she should budget for taxes. Too often people think about how much income they’ll need to maintain their standard of living without factoring in the impact of taxes. Overestimating taxes can lead you to delay your retirement unnecessarily. Even worse, underestimating taxes can potentially derail your retirement plans since you could end up with  a lot less income to spend than you planned for.

    Unfortunately, this is one retirement expense that can be particularly difficult to estimate. That’s because taxes are not only a function of how much income you have but what kind of income and even what state you live in. Let’s take a look at how different potential sources of retirement income are taxed and how you might be able to reduce those taxes.

    Home: If you decide to sell your home when you retire, $250k (or $500k if the home is owned by you and your spouse) of gain is tax-free as long as you lived in it for 2 out of the last 5 years. That means don’t rent it out for more than 3 years if you don’t want to pay taxes on a lot of gain when you sell.

    Pension: If you’re fortunate enough to receive a pension, these are taxed as ordinary income, which means they’re taxed at progressive tax rates just like your salary but without the FICA portion. (The FICA amount for 2011 is 1.45% for Medicare and 5.65% on incomes up to $106,800 for Social Security so you can expect your after-tax pension income to be that much higher than the same amount of wages before taxes. )

    There are a couple of traps to be aware of. If you take your pension while you’re still working, the extra income could push you into a higher tax bracket so you may want to delay your pension until you stop working. If you take part or all of your pension as a lump sum, you’ll have to pay taxes on the lump sum, which could also bump you into a higher tax bracket, plus possibly a 10% penalty. You can defer taxes by rolling the lump sum into another retirement plan like a 401(k) or IRA.

    401(k) and IRA withdrawals: Withdrawals from traditional 401(k) and IRA accounts are also taxed as ordinary income  and can be subject to a 10% penalty if you’re under age 59 1/2. With a 401(k), one way you can avoid that 10% penalty is if you turn 55 or older the year you leave the company. If you qualify for that exception, you may not want to roll your 401(k) into an IRA for that reason until you reach 59 1/2.

    Read more at Forbes

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