Taxes on Retirement Income
Being Smart About Tax on Retirement Income
When planning for your retirement budget, you’ll need to factor in the taxes on retirement income. Taxes on retirement income vary depending on the type of income. You may be relying on a variety of sources, including Social Security benefits, and distributions from pensions, annuities, IRAs and other retirement insurance plans. If you plan ahead, you can minimize the impact of taxes on your retirement years.
Tax on Retirement Income: Social Security
Social Security benefits may be non-taxable or partially taxable, depending on your total income from other sources. The IRS Instructions for form 1040 p. 27 has a “Social Security Benefits Worksheet” which will help you work out how much tax you will owe.
Tax on Retirement Income: Pensions and Annuities
Your pension or annuity may be fully or partially taxable. IRS Publication 575, Pension and Annuity Income, provides comprehensive information about figuring the taxable amount.
Pension and annuity income is reported to you using Form 1099-R. Your plan administrator can help you work out what your pension payments will be, and what part of the payments will be considered taxable income.
Tax on Retirement Income: 401(k)s and IRAs
Payments from your employer’s 401(k) plan are fully taxable since the contributions were not included in your taxable income. Payments from Roth 401(k) accounts are treated in the same way as Roth IRA distributions.
Distributions from your individual retirement account may be fully taxable, partially taxable, or completely tax-free depending on the type of IRA you have.
Payments from deductible Traditional IRAs are fully taxable once you begin to withdraw. Payments from non-deductible Traditional IRAs are partially taxable. Payments from Roth IRAs are completely tax free as long as: your first Roth IRA contribution was made at least five years prior to any withdrawal payment, and the funds are distributed after you reach age 59 and a half. For details, see Are Roth Distributions Taxable? in Publication 590.
Your taxes will also depend on when you begin making withdrawals; for details, also see Publication 590, “When Must You Withdraw Assets?”
State Tax on Retirement Income
Some people choose their retirement spot based on whether or not their chosen state has a state income tax. But before you look into moving, make sure to investigate the other taxes levied by your state of choice – higher sales and property taxes can more than offset the lack of a state income tax.
Taxes on Retirement Income
We’ve given you a rough sketch of how to think about tax on retirement income – but tax codes are notoriously complicated. You now know some of the issues you’ll need to address, but make sure you consult with a financial professional when making final choices about how to handle your retirement income plan.
See also our section on retirement income security, and supplemental retirement income.
