Taxes don’t stop when you stop receiving a paycheck. If you have multiple sources of income in retirement, your tax burden could be substantial. By understanding how different types of income are taxed, you can develop income planning strategies that work to lower your taxes throughout retirement. Start with these 4 types of retirement income and how they’re taxed.

Investments held for over a year are taxed at preferential rates.

Investments that are held for one year or less are considered short-term capital gains. Short-term gains are taxed at ordinary income rates. However, investments that were held for over a year (long-term capital gains) are taxed at either 0%, 15%, or 20%, depending on income level.[1]

Your Social Security benefit can be taxed.

To figure out if your benefit can be taxed, add up your adjusted gross income, nontaxable interest, and half of your Social Security benefit to get your combined income. If your combined income as an individual is between $25,000 and $34,000 or is between $32,000 and $44,000 as a married couple filing jointly, up to 50% of your benefit may be taxable. And, if your combined income as an individual is over $34,000 or over $44,000 as a married couple filing jointly, up to 85% of your benefit may be taxable[2]. Note that these income thresholds have not increased since they were first instituted in 1984, and there are no current plans to adjust them with inflation.[3]

Retirement Account Distributions

Distributions from traditional retirement accounts such as IRAs, 401(k)s, 403(b), 457, and thrift savings plans are taxed as ordinary income. The 3.8% investment surtax could apply to you if you are taking retirement account withdrawals and your income is above $250,000.[4] If you plan on getting most of your retirement income from these sources, keep in mind that it can potentially affect your tax burden in retirement. Keep in mind that at age 72, you will most likely be required to take minimum withdrawals from your tax-deferred retirement accounts. Amounts are set by the IRS and may force you to withdraw more than you normally would in one year. This could mean an increased tax burden.

Annuity Payments

Annuities offer certain tax benefits. Annuities can be purchased with pre-tax dollars, in which case payments are taxed as income. However, annuities can also be funded with after-tax dollars, in which case taxes are only owed on the earnings.[5] There are many options when it comes to annuities, and a professional can help you pick one that fits with your overall finances and retirement goals.

Many people assume their taxes will substantially decrease once they stop working, but this isn’t always the case. Taxes could actually be your biggest expense in retirement. Tax and income planning are important parts of a comprehensive retirement plan, and we don’t forget it. To start exploring tax minimization strategies in retirement, schedule your no cost, no obligation financial review with us.

[1] https://www.irs.gov/taxtopics/tc409

[2] https://www.ssa.gov/planners/taxes.html

[3] https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html

[4] https://www.forbes.com/sites/baldwin/2021/02/05/ira-calculation-errors

[5] https://www.annuity.org/annuities/taxation/

Investment advice is offered through APO Financial Services, LLC. Insurance and fixed annuity products are offered through our affiliates, Asset Protect One, Inc. and/or APO Financial Services, Inc. No persons associated with APO or its affiliates is a licensed attorney or tax professional and nothing on this Page should be considered tax or legal advice.

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