4 Things to Understand About Taxes in Retirement

There are probably a few surprises in store for you in retirement, but your tax burden shouldn’t be one of them. Even if you don’t receive a paycheck anymore, it doesn’t mean you can’t have a plan to help minimize taxes in retirement. 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 things to understand about taxes in retirement.

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^[1]. This is something to keep in mind when you are deciding when and how to claim Social Security.

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

Investments that were 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.^[2]

You can take a bigger standard deduction after you turn 65

Even if you’ve itemized your taxes in the past, you might not always do so. If you take the standard deduction, be aware that Americans 65 and over can take an additional $1,300.^[3] If you’re under 65, the standard deduction for the 2019 tax year is $12,200 for single filers and $24,400 for couples filing jointly.^[4]

Distributions from your traditional IRA are taxed as regular income.

Distributions from traditional retirement accounts such as IRAs, 401(k)s, 403(b), 457, and thrift savings plans are taxed are ordinary income. 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. An alternative option is contributing or converting to a Roth IRA. Taxes are paid upon contribution or conversion, and withdrawals are not taxed.

At Epstein & White, we understand that taxes could be your biggest expense in retirement. Many people assume their taxes will decrease substantially once they stop working, but this isn’t always the case. 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, click here to schedule your no cost, no obligation financial review.