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Taxation in Retirement – Be Prepared!

21 September 2022

Our last post concerned whether to convert your IRA to a Roth IRA.

This week, we talk about your income taxes in retirement. It’s almost as important to plan for these tax expenses as to plan for your income when you begin this new stage of your life.

Indeed, every factor affecting your retirement plan needs to be identified and taken into account long before you cease working – and that includes the income taxes you will have to pay when you are no longer earning a salary.

While your tax bracket may be lower in retirement than during your working years, not every portion of your post-retirement income will necessarily be taxed at the same rate. For example, funds withdrawn from a non-qualified brokerage account would be taxed at long-term capital gains rates, rather than at regular income tax rates.

Consider the following hypothetical case – Mary plans to retire in 5 years; she expects to have income available from the following sources:

  • A 401(k) plan from her most recent employer, into which she rolled 401(k) plans from her last two employers.
  • A Roth IRA, which she converted from a traditional IRA in 2016, paying the full income tax amount due upon conversion.
  • An annuity she purchased.
  • Social Security.
  • An individual brokerage account.

Federal taxation would be as follows:

  • Distributions from the 401(k) plan would be taxed at the ordinary rate tied to Mary’s overall taxable income.
  • Withdrawals from her Roth IRA would be tax free, assuming as we have that she made the conversion 5 years or more before she begins distributions.
  • Withdrawals from the annuity would be taxed at ordinary rates until Mary has exhausted the initial investment amount’s earnings (by law, earnings are to be withdrawn first). Later withdrawals of her original investment amount are not taxable.
  • Social Security income is taxed depending on Mary’s combined income and her filing status. Assuming Mary is widowed and therefore filing as a single individual, she will add her adjusted gross income, her non-taxable interest, and half of her Social Security income. If the total of the aforementioned items is over $25,000, taxes may be due on up to 50% of her Social Security income. If her combined income is over $34,000, she may have to pay taxes on up to 85% of her Social Security income.
  • With her non-qualified-retirement assets, Mary need not pay taxes on every dollar she withdraws. Taxes are due only on such withdrawn funds as result from capital gains, interest, and dividends, since the investments were made with post-tax dollars. Withdrawals, assuming she has held these investment positions for over a year, will be taxed on the long-term capital gains of the asset(s) sold. Capital Gains are currently subject to an effective top tax rate of 23.8% – if Mary’s taxable income is subject to the top capital gains tax rate of 20% and the 3.8% net investment income surtax levied on single individuals with adjusted gross income (AGI) of over $200,000 and on married joint filers with AGI over $250,000 (married individuals who file separately have an AGI limit of $125,000). However, Mary’s capital gains may incur a rate as low as 0%, depending on her actual income in a given year – for 2022, she would be subject to 0% capital gains taxes if her single-filer taxable income were under $41,675, or $55,800 if she qualifies for head-of-household status.

Of course, there are additional potential sources of income – and potential tax savings.

For example, long-term capital gains can sometimes be wholly or partially offset by long-term capital losses before taxes are calculated.

Some states attract retirees with a no-state-income-tax policy – these are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Moving to one of these states could completely eliminate the need to pay state income taxes. Other states have very low income tax rates, and/or low sales tax and property tax rates. If you are thinking of a move when you retire, these are facets to consider – though ultimately your plan needs to fit all your retirement needs, and these should not be solely financial goals.

Your CPA/financial planner can help you project your estimated tax rates in retirement year-by-year, and assist in planning how to fund your retirement – not merely calculating the amount of income you need annually, but where and when to take that income from.

S/he can guide you through the particulars of every investment you own, what withdrawing from the individual assets would mean for you, and how it could potentially affect your tax liabilities.

In short, s/he will help you plan for your retirement, rather than simply amassing investment and retirement accounts. This planning, in turn, needs to focus on what you want out of your retirement – your goals, your needs, your desires.

Of course it’s important to put those investment and retirement accounts in place and contribute to them regularly. But retirement planning is much more than total dollar amounts – and your financial planner knows both that fact and how to leverage your assets to give you the best possible retirement plan to meet the long-term goals that are uniquely yours.

Because your plans are just that – they are yours. They aren’t anyone else’s plans. Your goals are your own, and each individual’s goals are based on their unique wants, needs, and circumstances.

If you are wondering how to best plan for your own retirement, and would like some counsel and perspective from a seasoned financial planner, please click here to email us directly – we are here to help.

Until next Wednesday –



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