One of the most overlooked aspects of retirement planning is how current sources of income are taxed. If you’re like many Americans, you might have a number in mind about how much you want to accumulate when you retire. But if you ignore the taxation of your income after you retire, the number you have in mind might not offer you the lifestyle you want.
Also see: 6 Types of Retirement Income That Are Not Taxable
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Social Security
Social Security might seem like a benefit that shouldn’t be taxed — and for some Americans, it isn’t. However, the percentage of Americans who pay no tax on their Social Security benefits is small. If you are a single person and your combined income is between $25,000 and $34,000, you will have to pay up to 50% of your benefits. But if you earn more than $34,000, you’ll have to pay up to 85% of your benefits.
If you are a co-registrant, the same principle applies, but the income brackets are higher. Co-filers pay tax on up to 50% of benefits with earnings between $32,000 and $44,000, with earnings over $44,000 subject to tax on up to 85% of benefits. benefits.
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Pension
Your pension is a bit like a 401(k) plan, except only your employer contributes. Because your employer receives a tax deduction for any contributions they make on your behalf, any payments you receive will be fully taxable at ordinary tax rates.
One of the few exceptions is for pensions you pay into after tax, although again this is quite rare. In this case, the portion of your payments that represents your return of capital will not be taxable.
Withdrawals from the pension plan
In most cases, withdrawals from a pension plan are fully taxable as ordinary income. This is true for 401(k) plans and traditional IRAs, as well as a host of other less common retirement plans, from 403(b) plans to 457 plans and others. Even if your earnings in a retirement plan come from capital gains, your withdrawals will still be taxed as ordinary income.
One of the few exceptions to this rule is a qualified withdrawal from a Roth IRA. Contributions to a Roth IRA are made with after-tax money, but all qualified withdrawals — including earnings — are tax-exempt. After-tax contributions to a 401(k) plan can also be withdrawn tax-free in retirement, although earnings related to these contributions cannot.
Annuities
Taxing annuities can get complicated, but there are basically two types you need to be aware of: qualified and non-qualified.
Qualifying annuities are funded with pre-tax money, just like a traditional IRA or 401(k) plan. So when you receive a distribution from a qualified annuity, all the money you withdraw is fully taxable as ordinary income, because nothing was ever taxed.
Non-qualified annuities are funded with after-tax money, much like Roth IRAs. This means that when you receive a distribution, only the income portion of your withdrawal will be taxed. Your after-tax contributions can be withdrawn tax-free.
Capital gains
Capital gains in retirement are taxed the same as before you retired. For gains held for one year or less, you will be taxed at your ordinary tax rate. For gains held for more than one year, you are entitled to the most advantageous long-term capital gains rate, which is generally 15%. However, you can lower this rate as low as 0% depending on your income.
For the 2022 tax year, the income threshold for the 0% capital gains rate is $41,675 if you are single or married filing separately, $55,800 for those filing as head of household and $83,350 if you are married filing jointly or an eligible surviving spouse.
Although this does not apply to most Americans, high earners may face a long-term 20% capital gains tax rate. Depending on your filing status, here are the income thresholds for the 20% long-term capital gains tax bracket:
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Single: taxable income greater than $459,750
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Married filing jointly or qualifying surviving spouse: taxable income greater than $517,200
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Head of household: taxable income greater than $488,500
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Married filing separately: taxable income over $258,600
Keep in mind, however, that in some rare cases, long-term capital gains tax rates may be even higher. Specifically:
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Any Section 1250 gain recaptured from the sale of Section 1250 real estate: 25%
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Net gain from the sale of collectibles, such as coins and artwork: 28%
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The taxable portion of a gain from the sale of qualified small business stock under section 1202: 28%
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This article originally appeared on GOBankingRates.com: 5 taxes that might surprise retirees