Tax Planning For Retirement 101

Once you retire, your finances will change in a few different ways. There will also be new rules and opportunities that come with tapping into your retirement nest egg. That’s why you need to have a solid retirement planning tax strategy in place.

Of course, if you don’t know or understand what your options are or how to manage this new phase of taxation, you’ll face a lot of challenges. Not to mention, you may end up paying more in taxes than necessary.

Consider this your tax planning for retirement 101. Keep reading to learn more.


How Do Taxes Work During Retirement?

First thing’s first—yes, you have to pay taxes, even when you’re retired. We know, it doesn’t seem fair, but your 401K, IRA account, and Social Security benefits are still considered taxable income. This is why your retirement planning is crucial.

Your post-retirement taxes are calculated based upon your yearly income as you receive it. It’s very similar to how regular income tax works, but each type of income you receive will have different tax rules that apply. Most importantly, you’ll need to calculate and estimate the amount of taxes you’ll be paying during retirement so you can set up your tax withholdings based on each type of income.

Let’s take a closer look at some of the different types of retirement income and how you can estimate your taxes for each one.


Social Security

Your Social Security benefits come with some perks. If your only source of retirement income is coming from Social Security, then you won’t have to worry about paying any taxes during your golden years. However, if you have other sources of income, then you’ll have to pay taxes on a portion of your Social Security.

The taxable amount can be anywhere from 0% to 85%, depending on the amount of income you’ll receive aside from Social Security. That other income is referred to as the “combined income” by the IRS, and there’s a specific formula that helps you determine the taxable percentage of your Social Security benefits based on your combined income.

So, if you have a pension that pays out a high monthly income, you’ll likely pay taxes on 85% of your Social Security benefits. In total, your tax rates can run anywhere from 15% to as high as 45%.


IRA and 401K Withdrawals

Withdrawals from retirement accounts are typically taxed during retirement. This means that any withdrawals coming from your IRA’s, 401K’s, 403b’s, 457’s, and so on will be reported on your tax returns as taxable income.

The amount of tax you pay on these withdrawals depends entirely on the total amount of income and deductions you have and which tax bracket you’re in during that year. For example, if you have a year with more deductions from expenses than income, then you may not have to pay any taxes on your withdrawals for that year.

If you have a Roth IRA, you’re at an advantage. When done correctly, Roth IRA withdrawals have the potential to be completely tax-free. In some cases, your withdrawals may trigger a tax or even a penalty, but there’s a straight forward set of rules you can follow to determine whether your withdrawals will be tax-free or not:

  1. If you withdraw only the amount of your original contributions, regardless of age.
  2. If you are 59.5 years of age and you’ve had your Roth IRA account for five years or longer.
  3. If you are 59.5 years of age or younger, have had your Roth IRA account for five years or longer, and fall under these categories:
    1. You are taking the distribution due to a disability
    2. You are the beneficiary of the Roth IRA account inheritance
    3. You are using the distribution to buy or rebuild a home
    4. You meet the requirements for other distribution exceptions

You can learn more about Roth IRA account rules here.



If one of your sources of retirement funs comes from a pension, you’ll most likely be taxed. Most pension accounts are funded with pre-tax income, which means your entire annual pension income is included on your tax return each year as taxable income. In this situation, you can request that your taxes be withheld from each pension check you receive to make your life easier.

There are also guidelines to determine whether or not you’ll be taxed on your pension as well as how much. For example, if the money went into the account before tax, then once you withdrawal it, it will be taxed. If a portion of your pension is funded with after-tax dollars, then only that portion becomes taxable.


Annuity Distributions

Your annuity distributions can go two ways. If you’ve purchased annuity using an IRA another retirement account, then the IRA rules listed above apply to any withdrawals or annuity payments.

If your annuity was not purchased with an IRA or another retirement account, then the tax rules will depend on the type of annuity you purchased. If you’ve purchased an immediate annuity, then a portion of each payment is considered a return of principal and interest. Only the interest will portion will be included as taxable income.

If you’ve purchased a fixed or variable annuity, then your earnings must be withdrawn first. This means that if your account is worth more than your contributions to it, then your initial withdrawals are considered earnings or investment gains, which is all taxable income. Once you’re down to withdrawing your contributions, it’s no longer considered taxable income.


Let Us Help You With Your Nest Egg

Retirement should be a time of enjoyment, not stress. If you have multiple retirement income streams, even beyond the four types of income listed above, then you’ll need legitimate wealth management strategies for your retirement. If you’re not properly prepared, you could end up losing a lot of your hard-earned retirement money to taxes.

Do you need help understanding how taxes affect your retirement plan? Let us know how we can answer your retirement planning questions!

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