Taxes in Retirement: How Your Income Will Be Taxed


When you think about retirement, you probably envision the fun trips you will take and time spent with your grandchildren. You probably don’t think about taxes. We think you should.

While you certainly have savings plans in place for retirement, you also need to plan for taxes, both at the state (at least in most states) and federal levels. Some of the most common forms of retirement income, including your Social Security benefits and withdrawals from traditional IRAs as well as 401(k)s, are taxed.

What should you plan for? While it’s hard to give an exact number, here are a few you should be prepared for as you plan those fun trips and play with the grandkids.

Traditional IRAs and 401(k)s

You can save tax-deferred in these accounts, which allows you to keep more of your income before you retire. But you will pay taxes on the money and the gains they have made in savings. You can only defer withdrawals for so long — by age 72, there are required minimum distributions for those born after July 1, 1949 (otherwise, it's age 70½ ).

Roth IRAs

Though withdrawals from Roths are tax-free, that's only if you have had your account for at least five years and you are older than 59½.

Pensions

The full amount of your pension, whether you worked for a private company or government agency, is taxable unless you made after-tax contributions.

Mutual Funds, Bonds and Stocks

You will pay long-term capital gains taxes, which could be up to 20%, on the same of stocks, mutual funds or bonds that you have owned for at least a year.

Social Security

Until 1983, Social Security benefits were tax-free, but those with a higher provisional income now have to pay taxes on up to 85% of their benefits. If your provisional income is below $25,000 for an individual (and $32,000 for a married couple who files jointly), you won't have to pay taxes.

Savings Bonds

When the bond matures or is redeemed, it can be taxed by the federal government — but interest won't be taxed by your state or local tax authority. Keep in mind that you don’t pay taxes on interest municipal bonds (though you do pay capital gains when you sell them), and make sure you know the different types of bonds, so you pay accordingly.

Annuities

You pay taxes on the non-principal portion of an annuity. You should be able to find out how much of your investment is taxable from the insurance company you purchased the annuity from.

Dividends

Both qualified and non-qualified dividends are taxable. A tax professional can help guide you through the difference.

Savings and Money Market Accounts and Certificates of Deposit

You will pay regular income tax rates on all of these.


If you still feel uncertain about what is and isn’t taxable in retirement, reach out to Jay to discuss your retirement. He can help you plan so that you aren’t taken surprise by taxes in your golden years — and you can concentrate on the things that matter, like enjoying your new life.

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