How Different Types of Retirement Income Are Taxed

How much might state and federal taxes take out of your savings?

There are a good number of ways to save for retirement, from savings accounts to CDs, from 401(k)s and IRAs to pensions and annuities, from bonds to mutual funds and the stock market. Most people realize that the manner in which they save for retirement can impact how their money grows, but many people may not realize that the way in which they save also has different tax ramifications when the money is withdrawn in retirement. The following is a general overview from Yahoo Finance about how different savings might be taxed in retirement.

 

• Tax-deferred accounts. Withdrawals from traditional IRAs and your 401(k) will be taxed as ordinary income, which means at your top tax bracket.

• Taxable accounts. Profits from the sale of investments, such as stocks, bonds, mutual funds and real estate, are taxed at capital-gains rates, which vary depending on how long you’ve owned the investments. Long-term capital-gains rates, which apply to assets you’ve held longer than a year, can be quite favorable: If you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15% on long-term gains. Short-term capital gains are taxed at your ordinary income tax rate.

 

Interest on savings accounts and CDs and dividends paid by your money market mutual funds is taxed at your ordinary income rate. Interest from municipal bonds is tax-free at the federal level.

 

• Roth IRAs. As long as the Roth has been open for at least five years and you’re 59 1/2 or older, all withdrawals are tax-free. In addition, you don’t have to take RMDs from your Roth when you turn 70 1/2.

• Social Security. Many retirees are surprised — and dismayed — to discover that a portion of their Social Security benefits could be taxable. Whether or not you’re taxed depends on what’s known as your provisional income: your adjusted gross income plus any tax-free interest plus 50% of your benefits. If provisional income is between $25,000 and $34,000 if you’re single, or between $32,000 and $44,000 if you’re married, up to 50% of your benefits is taxable. If it exceeds $34,000 if you’re single or $44,000 if you’re married, up to 85% of your benefits is taxable.

• Pensions. Payments from private and government pensions are usually taxable at your ordinary income rate, assuming you made no after-tax contributions to the plan.

• Annuities. If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income.

 

The lesson here is to understand the tax ramifications of your retirement savings ahead of time before choosing an investment or savings method. The decision you make today could impact the amount of taxes withdrawn from your savings in the future.

 

Alternatives for Seniors provides this information for general knowledge purposes only. We do not intend to provide tax advice in this article. For specific information regarding your personal finances and taxes, please see your financial advisor or tax advisor.

Alternatives for Seniors is a print and online directory that specifically caters to the housing and personal care concerns of senior citizens and their families since 1992. Call our Senior Specialists at (888) WE-ASSIST (888-932-7747) or visit the Alternatives for Seniors website to begin searching for the perfect home for you or your loved ones. Also, be sure to join our Facebook community and follow us on Twitter.

 

BLOG Date: Tuesday, September30, 2014
Writer: Ryan Allen