What To Know About Taxes and Retirement

Retirement. No more workday grind. No more being a slave to the clock. No more having to worry so much about taxes.

Just a second. What was that about taxes? Sorry, but it’s not true. A lot of people go into retirement thinking keeping track of taxes practically disappears. The reality is dealing with taxes may actually get more complicated. In fact, taxes can be a retiree’s biggest budget item.

How could taxes possibly get more complicated? Situations vary, but let’s take a simple example. In your working life, odds are you’ve got income from essentially one source—your job. Taxes were taken from your paycheck and you didn’t think about it. Every April, you file a few fairly similar forms and there you go.

In retirement, however income streams vary—social security, retirement plan payouts, post-retirement jobs, etc. And there are taxes along the path of enjoying that income.

While you may not feel like it on any given day, if you’re approaching retirement age right now, you’re part of the wealthiest generation of Americans ever. You’re going to find yourself popular with the federal, state and municipal governments as you enter retirement. By the way, if you’re not in that close-to-retirement age group, it’s never too soon to start thinking about your future security—even if you’re a Millennial.

Social Security is Income

This one surprises a lot of people. Now, not everyone’s Social Security benefits are taxed, but they are  part of your retirement income stream so they MAY be taxed. How your payouts from Social Security are viewed by the government depends on how much other income you have. If your benefits are taxed, the taxable amount can range from 50 percent to 85 percent. The government explains it and various websites offer calculators to help you figure out your Social Security tax situation.

Got a Traditional IRA or 401(k)?

“Traditional” means an IRA or 401(k) that isn’t a “Roth” version. In a Roth IRA or 401(k), the money is taxed before it goes into the account, so different rules apply to the eventual payouts. In a traditional, the money is taxed on the way out, as regular income.

Do You Have Investments?

If you have a portfolio of private investments you’ll be depending on for some of your retirement income, you’ll need to pay taxes on your interest and dividends. If however you feel good about investing in government bonds, rather than in the private sector, the money you accrue is yours, free and clear of taxes.

Remember Pensions?

“Pension” is word that has been disappearing from corporate America for a while now, but there are still some out there. If you’ve got one, you can expect the payouts to be taxed at the top regular-income rate. Military-related or disability-related pension payments may not be taxed at all. If you have a pension, and you can be flexible about where you live in retirement, you may want to explore retiring to one of the states that doesn’t tax pensions.

About that Savings Account

Passbooks have gone the way of the dodo. While the interest rates on contemporary savings accounts are far from interesting (right now, they’re around 2 percent), people may keep some retirement money in savings banks, where deposits are protected by FDIC insurance. If you keep a big chunk of money in a traditional savings account, even a low rate of interest could raise your tax bill in retirement. Savings account interest is taxed at the full regular-income rate.

Your tax situation is an important part of your retirement planning and should be part of an integrated plan for retirement that factors in everything you want your retirement to be. If you are flexible about where you live in retirement, you may want to explore the possibility of retiring to one of the states that don’t tax pensions or Social Security.

Remember “no state tax on pensions and Social Security” doesn’t mean the federal government won’t be expecting its share!

 

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