IRS Woes: Don't Let Taxes Derail Your Retirement Plans

Kristin Gibson |

All United States citizens are subject to income tax from the federal government, even those who are retired. Living on a fixed income in retirement can be difficult, so it’s important to plan accordingly for how you will be taxed to get an accurate picture of your financial health.

Here’s what you need to know about taxable income in retirement.

Social Security Benefits

One thing that many retirees may not realize is that they can be taxed on part of their social security benefits. If you have substantial income in addition to your social security benefits, you may need to pay taxes on up to 85% of your benefit amount. The amount of tax you pay depends on your combined income—your adjusted gross income (AGI) plus any non-taxable interest plus half of your Social Security benefits.

When you complete your federal tax return, you can use your annual Social Security Benefit Statement to figure out how much of your benefit payment will be taxable. There are a few ways to pay these taxes: Make quarterly estimated tax payments or choose to have them withheld from your benefit payments.

Retirement Savings Plans

The amount of taxes you pay on distributions from your retirement savings accounts depends on the type of plan. For example, your contributions to traditional IRAs and 401(k)s come from your pre-tax income. So, when taking distributions from these types of accounts, you’ll be taxed at your regular income tax rate.

Roth IRAs and Roth 401(k)s, however, are built up with funds after taxes. This means that distributions from these types of savings accounts will not be taxed, provided they meet any withdrawal requirements or restrictions.

It’s a good idea to think about the amount of money that you need to withdraw from your retirement savings accounts. As mentioned above, your combined income is what will determine your income tax rate, so the more you take out of your retirement accounts each year, the more you may owe in taxes. To avoid unnecessary taxation, only take out the minimum distribution requirements or as much as you need above that amount in a given year.

Consulting a Professional

Figuring out how to pay your taxes, take distributions and live on a fixed income during retirement can be confusing. But a financial professional can help you navigate the waters of taxes in retirement and help you avoid pitfalls that may leave you in poor financial health. And planning ahead of time means being prepared for whatever retirement might throw your way.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2021 Advisor Websites.