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5 Facts About Taxes that are Important for Your Retirement Plan


When planning your retirement income, it’s important to consider how you may be affected by taxes. Here are just a few examples of the role taxes play in the many components of a retirement plan.

1. Your Social Security benefits are taxable.

All your working life you’ve paid taxes to contribute to the Social Security fund so that you could benefit from this social program in your retirement. Just when you thought you were done paying social security taxes, surprise! Your benefits are taxable too.

social security taxes

*Combined income = your adjusted gross income + non-taxable interest + half of your social security benefits

Data from Social Security Administration

2. Your Roth IRA is not really tax-free.

It’s simply positioned that way because your contribution is different than the ones you make to other types of IRAs. Money you contribute to a Roth IRA is money that you’ve already paid taxes on. So while you won’t have to pay taxes on future distributions, you’ve already paid the tax anyway. But with that said, many retirees do prefer to get the tax out of the way so they don’t have to factor it into their planned income distributions later.

3. Failing to meet your Required Minimum Distribution amount for your retirement accounts will result in more taxes.

If you have an IRA, SIMPLE IRA, SEP IRA, or retirement plan account, you will need to start taking withdrawals when you reach age 70.5. Unless you’ve previously paid taxes on the money, your withdrawals are included in taxable income and if those withdrawals are too small, you may have to pay an 50% excise tax on the amount not properly distributed. If you want to avoid this, make sure you know what your RMD is. Use the calculators the IRS provides or talk to your financial advisor.

4. Kiplinger rates California as one of the top 10 least tax-friendly states for retirees. According to Kiplinger, “California residents pay the highest income taxes in the U.S.” The highest income tax in California is 13.3% - and don’t forget this is in addition to the federal tax. Your retirement accounts such as IRAs and 401k's are taxed at normal income tax rates. But at least the good news is that your Social Security benefits aren’t subject to California State tax.

state taxes

Use Kiplinger’s Retiree Tax Map to learn more about retirement taxes in your state.

5. Health Insurance premiums are tax deductible.

Retirees have a long list of medical expenses that can be deducted, and many of those are things you might not expect. A recent study from Fidelity Investments estimates medical expenses in retirement to be almost $250,000 for a couple. Check the IRS Tax Guide for Seniors to make sure you know which of your medical expenses are deductible.

This material is for informational purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Please consult a qualified professional before making decisions about your financial situation.

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