Taxes & Retirement: OUCH!

By Admin Prepare

November 25, 2017

One of the most common and well known phrases in life is the one by Benjamin Franklin, who said “In this world nothing can be said to be certain, except death and taxes.”  Many people, though, feel that the tax part of this does not apply during the retirement years.  Unfortunately, this is not the case in most situations.  The fact of the matter is that taxes are everywhere in retirement, and can take a big bite out of your retirement nest egg if you are not careful.

The sad truth is that taxes are everywhere in retirement.  Fortunately though, there are ways to limit or eliminate some of these taxes if you know what you are doing.  This starts by properly understanding how each type of different retirement assets and incomes are treated tax wise.

Pensions – Pension income is generally taxed at the federal level as ordinary income at your regular rate in retirement.

Social Security – Up to 85% of your Social Security income may be federally taxed in retirement.  However, different planning tools and strategies may reduce or eliminate this tax.

Retirement Savings Plans – There are many types of retirement savings plans, such as 401(k)s, 403(b)s, and IRAs.  Most of these are funded with pre-taxed dollars, meaning they are fully taxable upon withdrawal in retirement.

Annuities – Annuities can be either qualified or non-qualified.  A qualified annuity is fully taxable in retirement.  A non-qualified annuity is taxed on the gains only, but the gains come out first.

Savings Bonds – Taxes on US Savings Bonds can be tricky.  This depends on the type and when and how interest is accrued and claimed.

Inheritances – Some types of assets that are inherited are fully taxable, while others are tax free.

There are many other retirement assets and incomes, some of which are tax free.  They key to a successful retirement is properly knowing and understanding how each type is taxed, and then strategically setting up a plan to minimize your taxes owed.