You are now retired. Because you are retired, you no longer have to worry about taxes. Right??? Wrong. You may continue to pay taxes after retirement. How much you pay depends on the amount and type of retirement income received.
There is one big problem. Unlike when you were an employee, taxes are not automatically taken out of your retirement. We will review withholding taxes and taxes on different retirement income.
Withholding Taxes
Taxes can be an unknown consequence for a newly retired individual. You go from earning a paycheck to getting retirement income. This is a simple idea. However, there is one lurking issue. When you are earning a paycheck, taxes are automatically withheld from your pay. When you retire, taxes are usually not automatically taken out. You have to request taxes be withheld from your retirement income.
This is can be a significant issue when you first start to receive retirement income. In the first year of receiving retirement income, we recommend reviewing the tax impact. You do this to be prepared for your tax obligations. In addition, you will likely be on a fixed income. Failure to review your tax impact may result in a large tax balance when your return is filed.
Social Security
You don’t need to worry about taxes, if you only source of income is social security. However, having other sources of income may affect the taxes on social security income. Depending on the amount of other income, anywhere from 0% to 85% of your social security may be taxed. We recommend reviewing your tax situation if you are earning social security along with other sources of income.
Taxes are not automatically withheld from social security income. You do need request taxes to be taken out.
IRA or 401(k)
There will be taxes owed for qualified retirement plan withdrawals. You have a qualified plan if you contributed before tax earnings. This means your 401(k), 403(b) and 457 plans along with Traditional IRAs. You have to request a certain amount of taxes to be taken out of your qualified retirement plan.
You may have a Roth IRA or Roth 401(k). You, generally, don’t pay taxes on qualified withdrawals from a Roth retirement account.
Pensions
Most pensions are taxable. When you retire, you will be asked the amount of taxes to withhold. We recommend reviewing you pension income along with other income before answering this question.
Annuity Distributions
There are all sorts of annuities. However, the basic one basic thing you will need to know about the annuity. Did you contribute before tax dollars or after tax dollars?
If you contributed before tax dollars, then all of your annuity distributions will be taxable.
If you contributed after tax dollars, then only your earnings portion of the distributions are taxable. For example, you contributed $10,000 of after tax dollars into an annuity. The annuity has earned $5,000 over the years and is now worth $15,000. Distributions from the earnings, $5,000, are taxable. Distributions from the original contributions, $10,000, are not taxable.