Most people could say they’ve had pretty uneventful tax filings for most of their life. If you worked a steady, fulltime job, for example, you probably filed your taxes during each year’s tax season—using a W2 to show what was taken out from your paycheck from the prior year, and maybe even a simple tax software or program like TurboTax to make it even easier.
There may have been some years where a big purchase (like a house) or windfall (like an inheritance) made things a bit more complicated. But for the most part, taxes were pretty simple while working.
And throughout your time working, you probably made some decisions to help reduce your tax burden, like contributing pre-tax dollars to a 401(k).
But now as you approach retirement, you’ll face lots of new tax situations you haven’t had to worry about before. Will you roll over your 401(k) to an IRA? What taxes will you owe as that money is distributed? Once you start receiving your Social Security benefits, do you have to pay taxes on that? What if you have company stock or a pension fund? Are those taxed differently?
Luckily, there is just as much guidance for these situations as there was when you were working!
Understand What Taxes You’ll Owe
The first step is knowing what kinds of incomes are taxed in retirement. Since you’ll probably be receiving income from a few sources, with different tax rates, your taxes will look different than they have in the past.
We’ll look at a few common income sources here—but there are also other sources of retirement income that can be taxed.
Your 401(k) and IRA
If you have a 401(k), you may consider rolling it into an IRA. Assuming you have more than $5,000 in the account, you could leave it in your employer-sponsored 401(k). Depending on the best investments and fees, this is up to you.
It’s important to know if you do transfer into an IRA, make sure it rolls over, rather than paying out to you. That would count as a distribution and would be taxed as such.
If you have money in a Roth IRA or 401(k), you don’t need to worry about this tax, since there are no mandatory distribution rules.
You can start taking Social Security payments at 62, but your benefits will be reduced by 25% or more forever. It’s smart to wait until 66 or 67 if you can (the exact age depends on your birth year). By waiting, you can maximize your benefits.
Whether your benefits are taxed or not depends on your income from other sources.1 Basically, the higher your income is each month, the more taxes you may owe on your Social Security payments. You can determine to have taxes withheld from your check if you do owe them, just as you would have done with your paycheck while working. You can do this with a Form W-4V.
Pensions are taxed fully. Just like with your Social Security benefits, you can have taxes withheld from your check. Of course, state tax laws are all different—some states exempt certain pensions, like military or government pensions. Some only tax a portion of pension payouts. The payer uses a Form 1099-R for you to use when filing.
If you have other investments that pay out (by selling stocks, earning dividends, etc), that will be counted as income too. Interest and capital gains are still taxable in retirement. Depending on your income, you may pay 0% in capital gains taxes.2
Use Expert Resources When Filing your Taxes
The reality is, your tax situation changes a lot as you enter retirement. Maybe the biggest change is the sources you get your earnings from, and the fact that your taxes owed for each can adjust based on the amount of income from the others.
That’s why it’s important to use the best resources so you can find all the ways to maximize your benefits and reduce your tax burden.
It can get complicated, which is why we partnered with the experts at TurboTax. They go even deeper into retirement taxes, explaining how HSAs factor in, and have great information related to the distribution changes due to COVID-19.
And right now, thanks to our partnership, you can even get $20 off when you file your taxes with TurboTax! Their software walks you through your situation, asking the right questions to help you navigate taxes after retirement.
1IRS, About Notice 703, Read This To See If Your Social Security Benefits May Be Taxable, March 2019.
2The Balance, How to Estimate Taxes in Retirement, October 2018.
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The Company and its producers do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors. The general and educational information presented in this material is a sales and marketing piece for insurance products offered by Bankers Life and Casualty Company.