Tax Issues in Retirement

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It's easy to overlook taxes in retirement. Read on for some scenarios you may encounter.

This post by Emily Guy Birken originally appeared on MoneyNing.

When you’re making your retirement plans, it can be easy to overlook one thing: taxes in the golden years. It’s important to remember that just because you are retiring doesn’t mean that you no longer owe taxes to the IRS. Here are the tax issues you will want to plan for during your retirement:

Remember the taxes you deferred in the IRA and 401(k)?

Many retirees will be counting on these retirement plans for at least a portion of their retirement income. But don’t forget that you have not yet paid taxes on your contributions to your traditional IRA accounts and 401(k) plans. These tax-deferred plans do not owe money to Uncle Sam until you withdraw the funds.

Of course, one of the benefits of these retirement plans is the ability to defer taxes. The withdrawals are taxed at the same rates as ordinary income, although deferring taxes is generally still in your best interest. In most cases, you will be in a higher tax bracket when you earn the money that you put into your tax-deferred retirement account than you will be when you withdraw the money. However, the IRS requires you to withdraw certain amounts from your tax-deferred accounts when you turn 70½ and every year thereafter, so you cannot defer your withdrawal (and your taxes) indefinitely.

Roth IRAs are different from the traditional type, in that you put post-tax dollars in them, meaning you owe the IRS nothing when you withdraw money.

Social Security may be taxed too

If you are counting entirely on Social Security income in retirement, then you will likely not owe any taxes on that money. However, if you have additional sources of retirement income – like an IRA, a pension plan, investment income, or even a job or freelance work – up to 85 percent of your Social Security benefits could be taxed.

The IRS considers three things when determining the taxes on your Social Security benefits: your adjusted gross income plus half of your Social Security benefits plus any tax-free income you have. If the sum of those three amounts is greater than $34,000 for an individual or $44,000 for a married couple filing jointly, then you will have to pay tax on your government benefits.

You are able to pay your taxes on your Social Security benefits in two ways: either by making estimated tax payments quarterly, or by having tax withheld from your benefit checks.


A common strategy for avoiding taxes on investments is to invest in municipal bonds, since the interest grows tax-free. However, tax-free investment income adds to the likelihood that you will have to pay taxes on your Social Security benefits. Putting your investment money in a tax-sheltered annuity will allow you to keep more of your government benefits, since it is not included in the formula for determining Social Security tax. But be careful here. Annuities are costly, which makes them very unattractive investments for many people.

The bottom line

A good retirement plan will include provisions for dealing with taxes. If you have put no thought into what your tax burden will be after you retire, it’s time to call your financial adviser and make these important provisions now.

Stacy Johnson

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