5 Things to Know About Taxes After Retirement

In retirement, taxes can substantially impact your finances. If you’re thinking about retiring soon, you’ll want to think about how taxes are going to impact your financial situation. If you plan well, it is possible to significantly lower the amount of taxes you’ll pay. Understanding the impact of taxes in retirement is the first step.


     1. What types of income are taxed, and how are they calculated?

Money you receive after you retire is still considered to be income, even though it will probably be from more than one source, which could include social security, savings, and investments. Retirement puts you in a different tax bracket and different sources are taxed differently. Social security, for example, may not be taxed at all if you are at full retirement age. If you aren’t, then it will depend on whether your income puts you over the limit for being taxed.

Savings and investment accounts

Your savings or Investment accounts are taxed differently, depending on what type of account it is. You need to know where your money will be coming from and what the tax cost for each source will be. Here are different types of retirement accounts:


Tax deferred – 401(k), 403(b), and IRA accounts are examples of tax-deferred accounts. They are tax-deferred until you take funds out of your account. Typically, you won’t withdraw funds until after you retire, when your tax bracket is lower, so you won’t pay as much tax as you would have. Everything you take out after that is counted as taxable income.

Tax-Free (Roth)

Roth IRA accounts are created so that if you meet certain requirements, you can take money out without paying taxes on it. Usually, the account has to have been open for more than 5 years and you must be over 59.5 years of age. If not, the earnings from the account (not including contributions) could be taxed, along with a 10% penalty.


Both tax-deferred and tax-free accounts shelter investments by not taxing them while the funds are in the accounts. This includes dividends and interest. Taxable accounts are different. Whether the money stays in the account or is withdrawn, all interest, dividends, or realized gains are taxed.

Social Security and Pensions

Pension benefits are usually taxed, though Social Security benefits are never fully taxed. It is determined by your adjusted gross income, and whether you have reached full retirement age. Your accountant will be able to determine how much of your Social Security income will be taxed.

Depending on how high your combined income is, you may have to include none, half, or up to 85 percent of your Social Security in your taxable income.

     2. Create a strategy for income distribution

When you understand how the money will be taxed, you should devise a strategy to minimize taxes for funds distribution. Decide the best way to withdraw from your different accounts to obtain the lowest feasible tax rate, instead of taking it all from just a tax-deferred or a Roth account.

save taxes in retirement

     3. How your state income tax plays a role

Right now there are 43 states that collect income tax. If you reside in a state that does, this is something else you will need to consider. Even though most of them still do not tax Social Security payments, 12 states still do. It’s important to know whether your individual state taxes pension income or withdrawals from tax-deferred retirement accounts.

     4. Use an accountant or CPA

A good accountant can help you understand if the strategy you are using is the most effective way to lower your tax liability. When they go through your files and documents for the prior year, they will be able to let you know if there is a better approach for your withdrawals or if your plan is a good one. They can help you avoid to mistakes in the future.

     5. Avoid the mistake most retirees make

Probably the biggest mistake made by people who are retiring or are already retired is to not have any tax plan in place. Without a plan, you are more likely to pay more in taxes than you should. Be smart, do a little homework and put some thought into crafting a strategy for having your retirement be as tax efficient as possible.


Jeffrey Ressler owns a boutique, full-service accounting firm in Boca Raton, Florida that provides individualized financial services, expert tax preparation, tax planning for individuals and companies, and finding solutions to IRS problems.