Is My Retirement Income Taxable? A Guide to Paying Taxes in Retirement
Do you have to pay taxes when you retire? The short answer is yes, but the longer answer is that they will differ quite a bit from those you’re used to paying. Your taxable income adjusts when you no longer draw a check from your employer.
The biggest difference, of course, is that you don’t have to contribute payroll taxes (or self-employment taxes if you worked for yourself). These are the taxes employers withhold on your behalf for the federal government, also referred to as Federal Insurance Contributions Act (FICA) taxes. They include your pay-in for Medicare and Social Security.
The FICA rate is 7.65 percent of your payroll earnings for most people. Those who make more than $200,000 or $250,000 for a couple are defined as high-income earners, and they must pay an additional 0.9 percent Medicare tax.
You stop paying into FICA or self-employment taxes when you no longer draw a paycheck. Still, you may have to pay other ones.
Whether you pay taxes on your retirement income depends in part on where it comes from. For example, if you have a Roth account, that money is not taxable because it was already taxed when it went into your account. You also won’t pay taxes on municipal bonds distributions, though gains can be taxed under capital gains.
Plus, you don’t pay taxes on Health Savings Accounts provided that you spend that money on qualified medical expenses. They will be taxed at a regular rate if you employ HSA funds to pay for non-medical expenses.
But other income, such as that from pre-tax retirement plans including annuities, 401(k)s and pensions, is subject to federal income taxes. You will pay at the regular tax rate, which varies depending on whether you file jointly, as the head of a household, or as a single person.
If you live in Pennsylvania, you don’t have to pay taxes on your retirement income — it is one of just two states in the country to have this policy. Whether you draw a pension or money from other retirement sources, such as annuities, Pennsylvania will not tax that money when you are 60 and older.
What About Social Security Taxes?
Many retirees depend on their Social Security to supplement other retirement income. Will you have to pay taxes on your Social Security income? It depends on how much you make. A little over half of people do have to pay.
Calculate your combined annual income, which includes half your Social Security income and your nontaxable interest, plus your adjusted gross income.
· Up to half your Social Security benefits will be taxed if you are single with a combined income of $25,000 to $34,000 or you are married with a combined income of $32,000 to $44,000.
· A maximum of 85 percent of your benefits can be taxed, which happens if you have a combined income of over $34,000 (single) or over $44,000 (married).
Preparing yourself for what you will pay in taxes upon retirement is a critical step in getting ready for those golden years. If you have any questions, contact Jay to discuss taxes in retirement.