Learn the Basics of Retirement Income Taxes

As you prepare for retirement, it is normal to worry about your income. Will it be enough to sustain your lifestyle in retirement? But aside from your anxiety about the money coming into your budget, have you prepared for the money that will go out? In particular, how much do you know about retirement income taxes? This is a complicated issue to discuss with your financial advisor or tax professional, but the following basics should give you a good overview of how retirement income is taxed.
​
Distributions from IRAs, 401(k) funds, and most pension plans are taxed as regular income. This income is treated the same as income from a salary, and is taxed based upon your regular tax bracket.

Withdrawals from a Roth IRA are not subject to federal income taxes. In order to qualify as tax-free income, the Roth account must be at least five years old and you must be at least 59 ½ years old.

If you sell an investment that you have held for a year or less, this will be referred to as a short- term capital gain. The profit from this sale will be taxed as regular income, according to your tax bracket.

If you have held an investment for more than a year, the profit from its sale will be counted as a long-term capital gain. Long-term capital gains are taxed at a different rate from your regular income. If you’re in the top income tax bracket, these gains are currently taxed at 20 percent. This is something to keep in mind when you sell long-term investments like real estate property or stocks.

While many types of retirement plan distributions are not regarded as net investment income, some will be subject to a 3.8 percent investment income surtax. Your tax professional and financial advisor can explain this surtax, and help you devise strategies to shelter some of your income from excessive taxation.

In some cases, depending upon your income, up to 85 percent of your Social Security payments may be taxed.The formula used to calculate this tax is complicated, and best explained by a tax professional. Consult with your accountant if you have any questions about federal or state income taxes, and make sure you know what to expect before you retire.

14569 - 2015/6/5