Plan Carefully for Retirement Income Taxes

seniorwomanMany retirees worry less about their retirement income, and more about losing a significant amount of that income due to federal income taxes. Indeed, tax planning should be an important part of your overall retirement strategy. Below you will find a basic run-down of how different types of retirement income are taxed. Talk to your financial advisor about taxes before you retire, so that you aren’t shocked on April 15 of the following year.

Ordinary income. Withdrawals from some tax-advantaged retirement accounts are taxed as normal income, according to the normal tax rate. IRAs, 401(k) accounts, and most pension plans fall into this category.

Tax-free income. If you invested in a Roth IRA, you can take withdrawals free of federal income taxes. In order to qualify, the account must be at least five years old, and you must have reached age 59 ½.

Short-term capital gains. If you sell an investment that you have held for less than a year, such as real estate property or stocks, the proceeds are taxed at the same rate as your regular income.

Long-term capital gains. The proceeds from the sale of an investment which you have held for more than one year is considered a long-term capital gain. If you’re in the top income tax bracket, the tax rate for long-term gains is currently 20 percent.

The 3.8 percent investment income surtax. This tax is imposed on the lesser of net investment income or the excess of modified adjusted gross income (over a certain threshold). However, many retirement plan distributions are not regarded as net investment income. This is an issue to consider carefully with your tax professional, who can advise you on ways to shelter some of your income from excessive taxation.

Social Security payments. Your Social Security benefits can indeed be subject to federal income taxes, depending upon your circumstances. The formula to calculate this tax is complicated, so it is best to consult with your accountant with any questions about taxation of your Social Security benefits. The main thing to remember is that yes, up to 85 percent of your Social Security income can be subject to taxes. Consult with your tax professional or financial planner before retirement, so that you know what to expect.


This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency

14483 – 2015/5/13