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  • Writer's pictureBruderman & Company

What Are the Different Types of Retirement Taxes?

When it comes to paying taxes, don’t expect to be off the hook upon retirement. Whether you like it or not, you’re going to continue to give a portion of your income to the government well into your golden years. Thankfully, with the help of financial consultants in 07663, you can come up with a retirement plan that can minimize your taxation.

Understanding where retirement taxes may arise is the first step to reducing your tax bill in retirement. You’ll be amazed at how this can positively impact the entire canvas of your income, personal finances, assets, and investments.

Different Types of Retirement Taxes

Pension Income Tax

You’ll have to pay taxes on distributions taken from your retirement accounts, tax-deferred annuities, or pension payments. Moreover, paying taxes at your federal income tax bracket rate is required when you receive payments from your pension. Taking a lump-sum distribution requires you to pay taxes on the total amount on the year you got the distribution.

Social Security Tax

You’ll have to check your Social Security benefits and taxable income in retirement. If your total taxable income reached a specific limit, you might have to pay taxes on your benefit amount. Retirees who usually face taxation are those who have huge income from various sources, including distributions from tax-deferred retirement accounts, dividend payments, or wages.

It’s important to note that about 50% of your benefit may be liable for income tax if your combined income filed individually is between $25,000 and $34,000. Moreover, exceeding the upper limit of $34,000 increases the percentage up to 85%.

If you have a spouse, you’ll also be required to pay income taxes on a certain percentage of your combined income when you file jointly. If you fall within the range for a joint return that’s between $32,000 and $44,000, as much as 50% of your benefits will be subject to income tax. Similar to individual tax returns, filing more than $44,000 increases the percentage to about 85%.

Traditional IRA and 401(K) Distribution Tax

Using your traditional IRA, 401(k), 403(b), or 457 as your income stream will cause you to pay taxes on any distribution amount. However, you won’t be required to pay taxes on any distributions if you have a Roth IRA because you’re already paid taxes on your contributions while you were employed.

This allows you to enjoy tax-free withdrawals in retirement. However, unless your Roth account has been open for at least five years, you won’t be able to take distributions from it.

Required Minimum Distribution (RMD) Tax

The IRS will require you to take distributions (RMDs) beginning at age 72 if you’ve contributed to a traditional IRA or an employer-sponsored plan. Since you were able to deduct your contributions to 401(k) accounts and IRAs while you were employed, the government will cash in on their share of your contributions.

However, you must distribute the correct amount of money from your account each year. Otherwise, you’ll be required to pay a large penalty.

Taxable Account Tax

Although the principal amount of your taxable accounts is fixed at your standard rate, your capital gains or dividends are taxed at a capital gains tax rate. Assets you’ve been holding onto for more than a year are subject to the long-term capital gains tax.

At 1879 Advisors, we want your retirement to feel like an achievement that marks the endpoint of a lifetime of hard work. Contact us today to ensure smooth financial sailing once you retire.

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