4 Important Tax Items Every Retiree Should Know About

Once you retire, it’s helpful to keep several tax opportunities and tax consequences in mind.

Retirement may mean that you’ve stopped working, but it doesn’t mean that you’re finished with worrying about taxes.

Many people think that when they get to retirement, they’ll be in a lower tax bracket. But the reality is that taxes in retirement can be more confusing, a bit trickier, and just as much a part of your financial reality as when you were working.

There is a wide range of tax implications for retirees, and having a good working knowledge of what those are ahead of time can reduce stress and make that hard-earned retirement more enjoyable. Here are four fundamental areas that are important to know:

Retirees Need to Do Proactive Tax Planning

Much of retirees’ income is still taxable, and planning to pay federal income taxes may require more thought. Some sources of income have federal income taxes automatically withheld, but other sources may have withholding only upon request. You may need to consider filing quarterly estimated taxes if you’re not having enough federal income taxes withheld from your distributions.

For example, with your 401(k) plan distributions, 20% is automatically withheld from some kinds of distributions but not required minimum distributions (RMDs). With pension payments, IRA distributions, Social Security retirement benefits and annuity payments, you can generally request to have taxes withheld — or not.

Here’s where it can start to get a bit complicated. Let’s take your 401(k) or IRA, for example. Distributions are taxed as ordinary income when you withdraw them. But those withdrawals can also have an impact on the taxes you pay on your Social Security benefit. If you take too much money out of your 401(k) — up to 85% of your Social Security benefit can be taxed as ordinary income.

These are examples of how taxes in retirement can get stacked upon one another. That’s why retirees need to understand the difference between…