Watch out for taxes in retirement

calculating

Although many people will see their taxes go down after they enter retirement, a lot of folks are surprised that many of their retirement income sources are subject to taxation. Taxes are something you definitely should take into account when figuring your retirement finances.

1. Tax-deferred account withdrawals. Tax-deferred accounts are a good place to put money while you’re in your peak earning years. But when it comes time to make withdrawals from those accounts, be prepared to pay the tax man. Traditional IRA and 401(K) withdrawals are taxed as ordinary income, which is the highest rate. If you take significant withdrawals, you could be pushed into a higher tax bracket. Roth IRA distributions are not taxable as long as you’ve had them for at least five years.

2. Proceedings from investment sales. Sales of stocks and bonds, mutual funds, real estate, and tangible assets, are taxed at capital gains rates, which may be ordinary income rate or a lower rate, depending on how long you’ve held the asset. Interest on savings accounts and money market funds is taxed at ordinary income rates.

3. Part of your Social Security retirement benefits are taxable if your annual income exceeds a certain level. In 2014 this income level was $25,000 for an individual or $32,000 for a couple filing jointly. Visit the Social Security income taxes page for more information.

4. Pensions and annuities. Pensions are generally taxable as ordinary income. The interest from annuities is also taxed at ordinary income rates; return of the deposited principal is not taxable.

As you can see, the federal tax code follows you into retirement. The rules regarding taxable income can be complex and change periodically. You might consider consulting an appropriate professional when figuring taxes into your retirement financial plans.

 

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