3 Big Retirement Tax Bites

I think we all know by now that taxes are just a part of life. We earn money at our job, we pay income taxes at the federal level, and many of us pay at least something into our state’s coffers as well. And with higher paychecks, we get higher taxes. So if that’s the case, you might figure that your taxes will go down once you’re retired and don’t have a paycheck anymore. Makes sense, right? Well, maybe not.

Here are three big ways retirees can be taxed that may catch you off guard if you’re not prepared:

Tax Bite Number 1: Retirement account distributions. You’ve been putting money away in your 401(k) for many years, and you’ve been able to take that earned income right off the top, paying no taxes. With any luck your money has been growing over time, but when you take that money out, guess what—it’s all fully taxable at ordinary income rates (which could be as high as 37% if you’ve got a lot).

Tax Bite Number 2: Your Social Security income. Yes, it’s true—your Social Security benefits could be subject to ordinary income taxes, depending on how much other income you have. What constitutes “other income”? Those IRA and 401(k) withdrawals mentioned above, non-qualified dividends, capital gains, interest income, tax-free bond income—all of that counts toward what’s called your modified adjusted gross income (MAGI), and if you hit certain thresholds, you might see as much as 85% of your benefits in the taxable column.

Tax Bite Number 3: Medicare Part B. Right now, most people on Medicare pay about $135 per month for their Part B benefit. They call it a “premium,” but it’s really a kind of tax. Did you know that if your adjusted gross income (AGI) goes over $85,000 for single people, or over $170,000 for married couples filing jointly, your premium goes up another $55 per month? And if your AGI is really high, like over $500,000, your premium could be as high as $460 per month per person. That’s a big jump.

That’s the bad news. The good news is that you may be able to avoid some or all of these taxes. An earlier video of ours shows how you might be able to pay zero in federal taxes on your retirement account distributions by keeping your withdrawals from those accounts under the standard deduction limits.

As for Social Security taxes, you may be able to reduce or eliminate those by taking advantage of Roth distributions and managing your other retirement income sources. In fact, we’ve actually done webinars on this very topic! If interested, you can register for the next one here

When it comes to the Medicare Part B premiums, you might not always be able to avoid the income-related monthly adjustment amount (IRMAA) surcharges, but you should know that for many retirees, they’re often just temporary (perhaps as the result of a large one-time capital gain). 

The point here is that in many cases, what seems like an unavoidable tax hit may actually be partially or entirely avoidable through proper planning with a financial advisor. Just knowing what the road blocks are in advance may give you a strategic advantage and allow you to keep more of your hard-earned money.

Want help planning your retirement? Give us a call. We’re here to help!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.

Rick Plum is a registered representative of, and offers securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training. John Dean is an associated person of Lucia Securities, LLC.

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