Don’t Let Your Tax Bill Catch You Off Guard in Retirement – Part #1

Do you know how taxes could affect your retirement income? Could they affect your Social Security and 401k & IRA withdrawals? Leah and Roland discuss how to calculate your tax rate and not be caught off guard by your tax bill in retirement.

Your Tax Bill and Social Security Income

Your benefits could likely be taxed if you have other sources of income.  You probably won’t pay any taxes in retirement if Social Security benefits are your only source of income.  A formula determines the amount of your Social Security that’s taxable. So you’re not caught off guard it is wise to include up to 85% of your benefits as taxable income on your return.2

The taxable amount depends on how much other income you have in addition to Social Security. The IRS calls this other income “combined income.” You can plug your combined income into a formula in a tax worksheet to what  will be taxable each year.

Retirees with high amounts of monthly pension income will likely pay taxes on 85% of their Social Security benefits, and their total tax rate might run as high as 37%. Retirees with almost no income other than Social Security will likely receive their benefits tax-free and pay no income taxes in retirement.3

IRA and 401(k) Withdrawals

Withdrawals from tax-deferred retirement accounts are taxed at ordinary income rates. This is a long-term asset, but withdrawals aren’t taxed at long-term capital gains rates. IRA withdrawals, are reported on your tax return as taxable income.4

Most people will pay some tax when they withdraw money from their IRA . The amount of tax depends on the total amount of income and deductions you have. It also depends on what what tax bracket you’re in. You might not pay taxes on withdrawals if you have a year with more deductions than income.  For instance, a year with a lot of medical expenses and itemize your deductions to claim them.

Roth IRA withdrawals are typically tax-free because you can’t take a tax deduction for your contributions in the year you make them. You’ve already paid taxes on this money. So once so you won’t have to pay again when you take it back out.


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