How Do Taxes Change In Retirement

How Do Taxes Change in Retirement?

Taxes are different when you retire and you should be mindful of those changes.

Updated on Feb 12 2020


Taxes are different when you retire and you should be mindful of those changes. A financial advisor can help you through these adjustments. Required minimum distributions, Social Security, the Senior Tax Credit, your retirement plans, and other income can change how you file taxes.

What is different about taxes when I retire?

Since you are not working once you retire, you may think that you don’t have to worry about taxes. This is not the case, however, as you will continue to pay taxes throughout your retirement and tax laws change all the time. Though you’ve been putting money aside in your retirement accounts and Social Security throughout your working career, now that you are taking money out of those accounts, this is considered to be taxable income.

Is my Social Security income taxed during retirement?

This depends on your situation. If Social Security is your sole source of retirement income, you probably won’t have to pay any taxes as your income will be too low to be taxable. If you are drawing money from your other retirement investments, you will most likely pay taxes.

Turbo Tax explains:

“If you worked for someone else or had net profits from self-employment before you retired, you’re probably eligible to receive Social Security benefits during retirement. Your Social Security benefits might be taxable, depending on how much income you (and your spouse if you file a joint return) have from other sources.

Between 50 and 85 percent of your annual benefit is taxable when the sum of one-half of your Social Security income, plus income from other sources is more than $25,000—or $32,000 if you’re married and file a joint return; or $0 if you file separately from your spouse. To reduce the risk of paying tax on your Social Security benefits, limit your income from other retirement plans (or wages from a part-time job) to ensure that you stay within the income limit.”

Understanding and maximizing your retirement tax benefits

  • Traditional IRAs - IRA distributions may or may not be taxed, or, they may be partially taxed depending on your contributions pre-retirement. Traditional IRA contributions are usually made with after-tax dollars. If you didn’t take a deduction for your contributions, the withdrawals are non-taxable.

  • 401(k)s - Funds in pre-tax plans, like your 401(k), are subject to income tax. Your tax rate will be based on the entirety of your taxable income during the year. Many people have multiple retirement income sources, so limiting distributions from pre-tax plans will help you save on your tax bill.

  • Required Minimum Distributions - With the exception of Roth IRA plans, retirement plans are held to something called “required minimum distributions.” At the age of 70 and 6 months, you must start taking your annual required minimum distributions. Use the RMD calculator to determine when and how much you should withdraw.

A financial advisor can help with your retirement taxes

The last thing that you want to think about during retirement is even more financial planning. After all, didn’t you spend decades of your life planning so that you don’t have to worry about finances in retirement? While that is most likely the case, things like tax and estate planning are major issues that need to be addressed. A financial planner can help plan for these events and give you the optimal advice for your individual situation.

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