Retirement Income Tax
How Will My Income Sources Be Taxed in Retirement?
Planning for retirement involves understanding how your income sources will be taxed. This knowledge can help you make informed decisions to maximize your retirement income and minimize tax liabilities.
Social Security Benefits
Taxation of Social Security: Up to 85% of Social Security benefits may be taxable depending on your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits).
Strategies to Minimize Taxes:
Delay claiming Social Security benefits until full retirement age or later to reduce taxable income during initial retirement years.
Manage other income sources to keep combined income below thresholds that trigger higher taxation on Social Security benefits.
Pensions
Taxation of Pensions: Pension income is typically fully taxable if contributions were made with pre-tax dollars. If after-tax dollars were used, only part of the income is taxable.
Tax Management Tips:
Understand the portion of your pension that is taxable.
Consider pension income when planning withdrawals from other retirement accounts to avoid pushing yourself into a higher tax bracket.
We wrote this guide to help you better plan and prepare for retirement. You’ll find a list of the professionals we recommend you talk to and the questions you should ask them as you prepare for retirement.
Downsizing and/or relocation
Taxes
Finances
Estates
Healthcare
IRA Withdrawals
Traditional IRA:
Withdrawals are taxed as ordinary income since contributions were made with pre-tax dollars.
Required Minimum Distributions (RMDs) must start at age 73.
Roth IRA:
Withdrawals are generally tax-free if the account has been open for at least five years and you're over 59½.
Roth IRAs do not have RMDs, providing more flexibility.
RMD Strategies:
Plan for RMDs to avoid large, unexpected tax bills.
Consider converting a Traditional IRA to a Roth IRA to manage future tax liabilities, keeping in mind the tax implications of the conversion itself.
Investment Accounts
Taxable Accounts:
Dividends and interest are taxed yearly.
Capital gains are taxed when investments are sold. Long-term capital gains (investments held for over a year) are taxed at lower rates than short-term gains.
Estate and Gift Planning
Estate Taxes: Use trusts and other strategies to minimize estate taxes.
Gift Taxes:
Gifts up to $15,000 per year per recipient are tax-free.
Report larger gifts on your tax return, but only amounts exceeding the lifetime exemption are taxed.
Understanding how different income sources are taxed in retirement is crucial for effective financial planning. By implementing tax-efficient strategies, you can maximize your retirement income and minimize tax liabilities. Consult with a financial planner and/or an accountant to tailor these strategies to your specific situation.
