As you plan for retirement, it is important to ensure you have enough savings and an appropriate investment allocation. However, one commonly overlooked aspect of retirement planning is taxes. The amount you pay in taxes can have a big impact on your ability to live the lifestyle you want in retirement, which is why it is important to consider your potential tax liabilities as you plan for your dream retirement.
Following are six taxes you may face in retirement.
#1 – Federal income tax
It is likely you will be subject to federal income taxes in some manner, even if you no longer earn employment income. If you contributed to tax-deferred retirement accounts, such as a 401(k) or traditional IRA, those assets become taxable as ordinary income when they are withdrawn. That means you will be subject to federal income tax based on your current tax bracket.
The good news is, if you also have after-tax retirement assets saved in a Roth IRA or Roth 401(k), you may have some added flexibility to reduce your tax exposure without lowering your monthly retirement income. Your wealth advisor and tax planner can help you develop a tax-efficient withdrawal strategy to optimize your retirement income and minimize your tax liabilities.
#2 – State income tax
Similar to federal income tax, withdrawals from tax-deferred retirement accounts may be subject to state income taxes, which can vary significantly depending on where you live. Some retirees choose to move to states that do not have state income taxes, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
If a move to a no-income-tax state is not in the cards for you, work with your tax planner and wealth advisor to develop strategies to lower your state income tax liabilities, especially if you live in a high-tax state.
#3 – Social Security tax
If Social Security is your only source of retirement income, it is likely that the amount you receive is too low to be taxed. However, for most retirees, Social Security is one of multiple sources of retirement income, which may include wages, retirement account distributions, interest, dividends, etc. If your combined income exceeds a certain threshold, you may be subject to tax on your Social Security benefits.
#4 – Net investment income tax (NIIT)
Depending on your income, you may be subject to NIIT, which is a 3.8% Medicare surtax that applies to those with a modified adjusted gross income (MAGI) that exceeds $200,000 for individual filers or $250,000 for those married filing jointly (2024). This tax is typically applied to interest, dividends, capital gains/losses and income from passive sources.
#5 – Capital gains tax
Capital gains tax is another important retirement tax to be aware of. This tax is assessed on the profit you make from selling an asset, such as a stock holding. There are two types of capital gains taxes:
- Short-term capital gains – Short-term capital gains taxes apply to the profits from the sale of an asset held for one year or less and are based on ordinary income tax brackets of 10%, 12%, 22%, 24%, 32%, 35% or 37%.
- Long-term capital gains – If you sell an asset you have held for more than a year, you will be subject to long-term capital gains tax. Depending on your taxable income and filing status, your long-term capital gains rate may be 0%, 15% or 20%.
#6 – Property tax
This is an important tax to plan for, because your property taxes may continue to rise over time as the value of your home grows. Fortunately, if you itemize your tax filing, you can claim a deduction for up to $10,000 of property tax (2024).
If you could use some help navigating taxes in retirement, we would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.
