Planning for Retirement? Keep Taxes in Mind

As you contemplate life after work, think about how the money you’ve invested for retirement will be taxed. Your tax advisor and financial professional can help.

401(k), 403(b) Plan/Traditional IRA

Contributions and earnings are tax deferred until withdrawal. Starting in 2023, required minimum distributions (RMDs) start at age 73. For 401(k) and 403(b) plans, RMDs can be delayed if you’re still working and don’t own more than five percent of the company. For traditional IRAs, RMDs must start at age 73, even if you’re still working. Withdrawals are taxed at your regular income tax rate. Withdrawals before age 59½ generally incur a 10% penalty.

Roth IRA and Roth 401(k)

Contributions are made with after-tax dollars, but withdrawals of earnings are tax free. Account owners can make penalty free withdrawals of earnings after age 59½ once the account has been open for at least five years.

Pensions

Withdrawals are taxable at ordinary income tax rates, assuming no after-tax contributions were made.

Social Security

Benefits aren’t taxed if provisional income is less than $25,000 for single filers and $32,000 for married joint filers. With income between $25,000 - $34,000 single and $32,000 - $44,000 joint, up to 50% of benefits may be taxed. If provisional income exceeds $34,000 single and $44,000 joint, up to 85% of benefits may be taxed. Provisional income equals your income and any tax-exempt interest, plus 50% of your Social Security benefit.

Annuities

If annuities are purchased with pretax dollars, such as in a qualified retirement account, payments are taxable as ordinary income.

Stocks, Bonds, Mutual Funds

Proceeds from the sale of investments held longer than one year are taxed at long-term capital gains. Gains on investments held less than one year are taxed at ordinary income tax rates.

Municipal Bonds

Interest is exempt from federal, and sometimes state, tax. Capital gains rates apply to the sale of municipal and corporate bonds.

Dividends

Qualified dividends are taxed at capital gains rates. Nonqualified dividends are taxed at ordinary income tax rates.