Death and taxes. They say those are the only two certainties in life. You can’t avoid either of the two, but you can manage them. For instance, you can be proactive about your health to reduce the odds of injury or illness and possibly extend your life. Similarly, you can take steps to minimize your tax exposure in retirement and maximize your discretionary income.

Many retirees fail to include taxes in their planned budget. They may assume that because they are no longer working, taxes won’t be a major expense. Or they may believe that their retirement income isn’t taxable. These assumptions usually are incorrect.

The truth is that much of your retirement income may be taxable. If you have failed to include taxes in your budget, you could be in for a serious surprise. While much of your income may be taxable, it won’t all be taxed the same way. By understanding how various forms of income are taxed, you can plan ahead and create a strategy. Below are four common sources of retirement income. If you haven’t developed a tax plan, now may be the time to do so.


Social Security Benefits

Social Security will almost certainly play a role in your retirement income mix. For many retirees, Social Security benefits are taxable. However, the extent to which your benefits are taxed depends on your income level. Social Security uses 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 more 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.


IRA and 401(k) Distributions

If you’re like many Americans, you’ve likely used a traditional IRA or a 401(k) to accumulate retirement assets. These qualified accounts are helpful retirement savings vehicles 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.

Tax deferral can help you accumulate assets. However, it can also create a tax liability issue in retirement. In most cases, these plans are funded with dollars that have never been taxed. At some point, you have to pay taxes on those funds. That usually occurs when you take distributions in retirement.

Distributions from traditional IRAs, 401(k) plans, SEP IRAs and other qualified accounts are treated as ordinary income. The Roth IRA is an exception, as it allows for tax-free distributions if you are over age 59½ and the account has been open for at least five years.

If you will rely on distributions from qualified accounts for retirement income, you could have sizable tax exposure. Be sure to plan accordingly to minimize your risk. You may want to carefully plan your distribution schedule or even consider converting your IRA to a Roth.


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 Benefit Resource Partners. 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.

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