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Do You Know How Your Retirement Income Will Be Taxed?

Filed under: Taxes and Planning, Retirement

There’s an old saying that death and taxes are the only two certainties in life. You may not be able to control when you die, but you can certainly take actions to improve your health. Similarly, you may not be able to avoid taxes completely, but you can take steps to minimize your tax exposure.

Many retirees make the mistake of assuming that taxes won’t be a major expense in retirement. They may feel that because they are no longer earning income, taxes are no longer an issue. Or they may believe that their retirement income isn’t taxable.

The truth is that many common sources of retirement income are taxable. If you haven’t included taxes in your retirement budget, you could be in for a nasty surprise. Of course, not all retirement income is taxed the same way. Below are four common sources of retirement income. If you haven’t developed a tax strategy, now may be the time to do so.


Social Security Benefits

Nearly all retirees rely on Social Security benefits for some portion of their income. Social Security benefits are usually taxable. However, the level to which they are taxed depends on something called “combined income,” which is the sum of half your Social Security benefit, nontaxable interest and your adjusted gross income.

If you’re a married couple with combined income of $32,000 to $44,000, up to half of your benefit could be taxable. If your income is above $44,000, you could pay taxes on as much as 85 percent of your benefit. For single filers, combined income from $25,000 to $34,000 could result in taxes on as much as 50 percent of your benefit. That exposure jumps to 85 percent if your combined income is greater than $34,000.1

You can have your taxes withheld from your Social Security payments. However, that will reduce your benefit amount. It’s important to understand your potential tax liability so you can plan ahead and budget accordingly.


Qualified Account Distributions

If you’re like many Americans, you probably have some amount of retirement assets in tax-deferred accounts such as an IRA or a 401(k) plan. These accounts are popular because of their unique tax treatment. Both allow for contributions with pretax dollars. They also offer tax deferral, which means you don’t pay taxes on growth as long as the funds are inside the account.

While tax deferral is a powerful tool, it can create tax exposure in retirement. In most cases, qualified plans are funded with dollars that have never been taxed. They can’t stay untaxed forever.

Distributions from traditional IRAs, 401(k) plans, SEP IRAs and other qualified accounts are treated as ordinary income. If these distributions will make up a significant portion of your income in retirement, you could have sizable tax exposure. Be sure to plan accordingly to minimize your risk.


Nonqualified Investments

You also may have savings and investments that aren’t held in an IRA or 401(k). These accounts are usually taxed in a variety of ways. For example, any income generated in the account by dividends or interest may result in tax liability. Also, you could face taxes on any capital gains. A tax or financial professional can help you better understand how your nonqualified accounts impact your tax planning.


Pension Payments

Will you receive pension benefits in retirement? If so, consider yourself lucky. Pensions are quickly disappearing from employer benefit options. While a pension may provide you with some income stability in retirement, it can also create some tax liability.

Many pensions are funded with pretax dollars. They also aren’t taxed while the funds accumulate during your career. Much like in a traditional IRA or a 401(k), those untaxed dollars have to face tax exposure at some point. That means your pension payments are likely to be taxable.

Ready to implement your retirement tax strategy? Let’s talk about it. Contact us at Ambrose Financial & Insurance Services. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.




Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. 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.

17377 – 2018/2/13