If there’s one area of retirement that often gets dumped into the “I’ll think about it when I have to” pile, it’s taxes.
Many people think of taxes as a problem to pay while they are working. After all, income taxes tend to take up the largest portion of our tax burden, but this retires when we do, right?
Well, not quite. While retirees may not draw a paycheck anymore, if their plan is set up correctly, they should still earn plenty of income.
There are all sorts of taxes that can hit in retirement. Here are a few of the most important:
Required Minimum Distributions (RMDs)
Standard IRAs and 401(k) accounts require the owner to begin withdrawing funds once they reach age 73. RMDs are counted as income, which means they are subject to income taxes.
(Note that with Roth IRAs and 401(k)s, it is the contributions that are taxed, not the distributions.)
Dividends
Retirees who own dividend-paying stocks typically receive payments every quarter. These payments are also considered income and are therefore taxable (in non-qualified accounts), even if you reinvest them.
Social Security Benefits
It often comes as a surprise, but a portion of your Social Security benefits may also be subject to taxes depending on your overall income in retirement. Typically, if half of your annual benefits combined with your other income exceeds $25,000 per year (if you are a single filer) or $32,000 (if you are part of a married couple filing jointly) then 50-85% of your benefits will be taxable.
Capital Gains
If you sell any securities for a profit, you will typically owe capital gains taxes on the proceeds received in non-qualified accounts.
There are other potential taxes, too. Annuity payments, net investment income taxes, property taxes — you get the idea. It can all feel overwhelming, but there’s good news: None of this has to derail any of your retirement goals or detract from your desired lifestyle. Like Monday mornings and the weather, taxes are simply a fact of life. We simply have to be conscious of these facts so we can factor them into our plans and prevent them from ruining our week.
