Understanding Taxation of Retirement Income-Part 1

Published on: Mar 3, 2024

When planning for retirement, understanding how taxes impact your income is crucial. In this two-part episode of “Beacon Retirement Strategies”, we will discuss the taxation of the four common retirement income sources and explore some defensive tax planning strategies worth considering, which could help reduce your tax liability in retirement. Part 1.

Taxation is an often-overlooked pillar of retirement planning. Taxes can significantly affect your retirement income and ultimately determine how far your savings stretch.

This episode focuses on taxation strategies, particularly for IRAs, 401(k)s, Social Security benefits, and dividends.

Why Planning for Taxation Matters

Many retirees fail to account for taxes in their retirement plan. A recent survey revealed that 57% of Americans rarely consider how taxes will impact their retirement income—a costly oversight. Taxes are likely to increase in the coming years, especially with the potential expiration of the Tax Cuts and Jobs Act in 2025. Proactive tax planning today can save you tens of thousands of dollars over your retirement.

Key Learnings: Understanding Taxation of Retirement Income-Part 1

How Taxes Impact Traditional IRAs and 401(k)s

  • Contributions to these accounts are tax-deferred, but withdrawals are taxed as ordinary income.
  • Required Minimum Distributions (RMDs) kick in at age 73, forcing you to withdraw—and pay taxes—on your savings.
  • The misconception: Tax deferral is often mistaken for tax savings.

The Tax Implications of Social Security

  • Social Security benefits can be taxed up to 85%, depending on your provisional income.
  • Provisional income includes half of your Social Security, dividends, capital gains, and other sources.
  • Learn how combined income sources can create a “tax torpedo” effect, increasing your overall tax burden.

Qualified vs. Non-Qualified Dividends

  • Qualified dividends enjoy favorable tax treatment, taxed at capital gains rates (0%, 15%, or 20%).
  • Non-qualified dividends are taxed at ordinary income rates, which can go as high as 37%.
  • Understanding how dividends are taxed can help you make smarter investment decisions.

The Benefits of Roth Accounts

  • Roth IRAs and Roth 401(k)s offer tax-free withdrawals in retirement, provided certain conditions are met.
  • Strategies like Roth conversions or backdoor Roth IRAs can help high-income earners enjoy these benefits.

 

Key Taxation Strategies to Explore

  • Tax Diversification: Avoid over-reliance on tax-deferred accounts like 401(k)s and traditional IRAs.
  • Roth Conversion: Convert taxable accounts to Roth IRAs for tax-free growth.
  • Social Security Optimization: Plan withdrawals strategically to minimize taxation on benefits.
  • Fee Reduction: Identify and eliminate unnecessary fees in your retirement portfolio.

 

If you want to retire in the next five years, there are three critical things you must consider doing now.

  1. Rebalance your investment portfolio.
  2. Know how you’re going to generate income in retirement.
  3. Take advantage of defensive tax planning strategies now.

Take Action on Taxation

Retirement planning isn’t complete without a forward-looking taxation strategy. Beacon Capital Management offers a FREE Customized Retirement Tax Savings Analysis, which:

  • Reviews your retirement portfolio for tax-saving opportunities.
  • Identifies strategies to minimize taxation on income like Social Security, dividends, and RMDs.
  • Helps you discover and possibly reduce unnecessary fees, potentially saving you tens of thousands of dollars.

This analysis is tailored to your unique situation, giving you actionable steps to protect more of your hard-earned money.

Here’s how it works… You provide us with some basic information. We discuss your options for potential tax-saving strategies that are best suited for your situation. You’ll walk away with a better understanding of your financial picture, including how much you can save in taxes when you retire.

If you’ve saved more than $250,000 for retirement, schedule your FREE Retirement Tax Savings Analysis, or give us a call (615) 488-9303. 

This is just the beginning of the conversation about taxes in retirement. Be sure to listen to Part 2, where we discuss the taxation of other income sources like annuities, stocks, and bonds. Until then, remember: peace of mind in retirement starts with a solid plan.

 

Also, check out these free retirement income planning and taxation strategy resources:

Free Guides & Whitepapers

Retirement Planning Articles

Retirement Talk YouTube Show

 

Don’t forget to listen to Part 2 next!

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