Tax Issues in Retirement

by Emily Guy Birken · 1 comment

Couple reviewing retirement plans

When you’re making your retirement plans, it can be easy to overlook one thing: taxes in the golden years. It’s important to remember that just because you’re retiring doesn’t mean that you no longer owe taxes to the IRS. Here are the tax issues you’ll want to plan for during your retirement:

Remember the Taxes You Deferred in the IRA and 401(k)?

Many retirees will be counting on these retirement plans for at least a portion of their retirement income. But don’t forget that you haven’t paid taxes yet on your contributions to your traditional IRA accounts and 401(k) plans. These tax-deferred plans don’t owe money to Uncle Sam until you withdraw the funds.

Of course, one of the benefits of these retirement plans is the ability to defer taxes. Though the withdrawals are taxed at the same rates as ordinary income, deferring taxes is generally still in your best interest. In most cases, you’ll be in a higher tax bracket when you earn the money that you put into your tax-deferred retirement account than when you withdraw it. However, the IRS requires you to withdraw certain amounts from your tax-deferred accounts when you turn 70½ and every year thereafter, so you can’t defer your withdrawal (and your taxes) indefinitely.

Roth IRAs are different from traditional IRAs; you put post-tax dollars in them and don’t owe the IRS anything when you withdraw the money.

Social Security May Be Taxed, Too

If you’re counting entirely on Social Security income in retirement, then you probably won’t owe any taxes on that money. However, if you have additional sources of retirement income — like an IRA, a pension plan, investment income, or even a job or freelance work — up to 85% of your Social Security benefits could be taxed.

The IRS considers three things when determining the taxes on your Social Security benefits: your adjusted gross income plus half of your Social Security benefits plus any tax-free income you have. If the sum of those three amounts is greater than $34,000 for an individual or $44,000 for a married couple filing jointly, then you’ll have to pay tax on your government benefits.

You can pay your taxes on your Social Security benefits in two ways: either by making estimated tax payments quarterly, or by having tax withheld from your benefit checks.


A common strategy for avoiding taxes on investments is to invest in municipal bonds, since the interest grows tax-free. However, tax-free investment income adds to the likelihood that you’ll have to pay taxes on your Social Security benefits.

Putting your investment money in a tax-sheltered annuity will allow you to keep more of your government benefits, since it’s not included in the formula for determining Social Security tax. But be careful here. Annuities are costly, which makes them unattractive investments for many people.

The Bottom Line

A good retirement plan will include provisions for dealing with taxes. If you haven’t put any thought into what your tax burden will be after you retire, it’s time to call your financial adviser and make these important provisions now.

Have you considered taxes in retirement?

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  • Kate says:

    Good thing I lost all my retirement money in the last three stock market crashes, I guess. At least I won’t have to pay more taxes. Yet.

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