fbpx
Offcanvas
(800) 644-1150

Don’t Be Surprised By These Taxes In Retirement

Throughout your working years, you earn your paycheck, and that paycheck is subject to various forms of taxation: federal taxes, state taxes, FICA, Medicare, and maybe a few others.  And the higher your paycheck, the greater the taxes you have to pay. At least that’s the idea. So if that’s the case, it would stand to reason that once you’re retired and those paychecks stop, those taxes will go down. Makes sense, right? Well, maybe not. Here are a few ways that a retiree can be taxed, which could catch you off-guard if you’re not prepared.

Taxes on Your Retirement Account Distributions

First, and maybe most noticeably, you’ll pay taxes on your retirement account distributions.  Maybe you’ve been socking money away for many years, and you were able to take that earned income right off the top, deferring those income taxes to a later date.  Well, at some point that “later date” will arrive, either at age 72 with required minimum distributions or even earlier than that.  With any luck, your money has grown over time, but now every dollar you take out is subject to federal income taxes at ordinary income rates (which could be as high as 37%, if you’ve got a lot). 

Taxes on Social Security Benefits

Second, your Social Security benefits may also wind up in the taxable column of your return.  That’s right: your Social Security benefits could be subject to ordinary income taxes, depending on how much other income you have. So what constitutes “other income”? Those IRA and 401(k) withdrawals I talked about earlier, as well as rental income, 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 subject to ordinary income taxation. 

Medicare Part B Taxes

Another tax that you’ll see in retirement is for Medicare Part B.  In 2022, most people on Medicare will pay about $170 per month for their Part B benefit. It’s officially called a “premium,” but it’s really a kind of tax. And if your adjusted gross income (AGI) goes over $91,000 for single people, or over $182,000 for married couples filing jointly, your premium goes up another $68 per month. And if your AGI is really high, like over $750,000 as a married couple, your premium could be as high as $578 per month, per person. That’s a big jump. 

What You Can Do

That’s the bad news. The good news is that you may be able to avoid some or all of these taxes with some strategic planning by looking at today’s brackets and your future projected brackets and try to use them to your advantage. 

For example, if you can “blend” your cash flow from IRA, Roth and personal accounts, you may be able to keep your overall taxable income down now by staying in lower income brackets or reducing the amount of Social Security that is subject to taxation, without having it blow up on you once your RMD’s begin.  Using the tax code – the standard deduction, the lower tax brackets and such – to your advantage should be the priority here. 

When it comes to Medicare Part B and Part D premiums, you can’t always avoid those extra income-related monthly adjustment amount (IRMAA) surcharges, but for many retirees, they’re often just temporary (sometimes the result of a large one-time capital gain).  

The important takeaway here is that what seems like an unavoidable tax hit may actually be partially or entirely avoidable through strategic planning with a financial advisor. I’ve said many times that knowledge is power, and sometimes just knowing what the potential road blocks are in advance may give you an advantage and allow you to keep more of your money. 

This is what we call tax management, and it’s something we do for our clients every single day here at Lucia Capital Group.  How can we help you? Just give us a call, and let us know! 

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.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

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 with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

Start Your Strategy

Personalized investment advice and support to help grow your portfolio