This Is How Your Retirement Income Is Taxed
Managing taxes in retirement can be difficult. Income and tax bracket changes may cause your tax situation to differ from that during your working years. Required retirement account withdrawals, as well as income from other sources, can all have an impact on your tax liability.
That is why it is critical to understand how popular forms of retirement income are taxed. This information can help you create a tax-efficient retirement strategy.
Here's a breakdown of several familiar retirement income sources, along with a quick explanation of the federal tax implications:
Social Security Benefits: Depending on provisional income, the IRS may tax up to 85% of Social Security benefits at ordinary income tax rates.
Pension: Payments are typically completely taxable as ordinary income unless you made after-tax contributions.
Interest-Bearing Accounts: Interest payments are taxed at conventional income rates, although municipal bond interest is exempt from federal and state taxes.
Sales Of Stocks, Bonds, And Mutual Funds: Long-term profits (kept for more than a year) are taxed at 0%, 15%, or 20% capital gains tax rates, depending on income level. Some taxpayers are subject to the net investment income tax (NIIT) at 3.8%.
Traditional IRAs And 401(k) Accounts: Contributions to regular IRAs and 401(k)s lower taxable income. However, withdrawals are taxed at conventional income levels. Required minimum distributions (RMDs) begin at age 73. Withdrawals before age 59 ½ incur a tax penalty.
Roth IRA And Roth 401(k): Contributions are not tax deductible. Withdrawals from Roth IRAs, including gains, are tax-free five years after the first contribution. Withdrawals before age 59 ½ incur a tax penalty.
Life Insurance Proceeds: Normally tax-free when received by a beneficiary. However, surrendering a policy for cash may result in tax consequences.
Annuities: The portion representing the principal is tax-free, while the earnings are taxed at ordinary income rates unless purchased with pre-tax funds.
