What Are the Tax Implications of Retirement?

Taxable Income Streams in Retirement

A key area of retirement planning is ensuring your income matches your expenses in the years you are no longer working. Many individuals often overlook the expense of taxes and how it impacts your retirement income.

If you decide to work in retirement, you will pay taxes on your income. In addition, many of your retirement income streams may be taxable:

• Social Security: Depending on whether you’re married and how much you earn, you may need to pay taxes on part of your Social Security payments. Some or most of your benefits are subject to tax if you’re single with provisional income in excess of $25,000 or married-filing-jointly with an income over $32,000.
• Pensions: You will generally need to pay taxes on your pensions, but some types, like disability and military pensions, may be tax-free or partially tax-free. Also, some states do not tax pensions, so you may receive some tax benefits if you move after retirement.
• Annuities: Like pensions, some annuity benefits may be taxable. Qualified annuity payments are taxable because you haven’t previously paid taxes on that income stream.
• Tax-deferred investments: Once you start to use your assets from an IRA, 403(b), 401(k), or another tax-deferred retirement account, you will owe taxes on any amount you withdraw. You may owe less if you remove only part of the amount, so a good withdrawal strategy for retirement funds is essential.
• Investments: Many retirees want to liquidate assets or use dividends and interest from investments to fund their retirement. However, some investments require a capital gains tax payment, which can range from 0-20%, depending on your income tax bracket. You need to pay taxes on stocks, bonds, mutual funds, and other taxable investment accounts the same in retirement as in pre-retirement.
• Life insurance cash values: You can withdraw the cash surrender values of life insurance policies tax-free by first accessing premiums paid. From there, you can access the remaining cash on a loan basis, tax-free. However, remember that accessing the cash value reduces the payout amount upon death. In addition, if cumulative loan interest exceeds the current policy cash value, the policy lapses. A lapsed policy means no life insurance protection and the likelihood of income tax.

Retirement and Taxes Strategy

You’re responsible for paying taxes on your retirement income, which may differ from your pre-retirement years. Also, in retirement, your cash flow may be more than your working years, but your tax reduction opportunities are less. Therefore, failing to plan and account for taxes can significantly impact your retirement assets.

You can minimize your tax burden when you retire by taking several steps:

• Think strategically: As you decide where you’ll live after retirement and how you’ll replace your income, consider the tax implications. Determine how much you could save by moving states or adjusting your plans.
• Consider gains and losses: You may be able to offset some capital gains taxes on some investments by using capital losses on others.
• Look into credits and benefits: Work with an advisor who can help you take advantage of any tax credits and deductions you may qualify for.
• Consider ways to reduce capital gains taxes: You may be able to make a charitable gift of some assets, creating a tax deduction.
• Implement a withdrawal strategy: Where possible, manage your taxes by keeping your income within the lowest tax bracket. Start withdrawals from taxable accounts, which enables tax-deferred retirement accounts to build in a tax-advantaged way. You can also use income streams already taxed, such as dividends. An advisor can work with you to devise a withdrawal strategy for you based on your goal and circumstances.

For informational purposes only. All tax laws and regulations discussed are subject to change. The content does not purport to present a complete picture, but Focus Partners believes the information is representative of issues and needs facing some clients and why they may seek our services.  This should not be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective should assume the above information serves as the receipt of, or substitute for, personalized individual advice. This represents the opinions of Focus Partners, may contain forward-looking statements, and presents information that may change due to market conditions or other factors. Nothing contained in this presentation may be relied upon as a guarantee, promise, assurance, or representation as to the future. Investing involves risk, including, but not limited to, loss of principal. Numerous representatives of Focus Partners may provide investment philosophies, strategies, or market opinions that vary. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. This is prepared using third party sources considered to be reliable; however, accuracy or completeness cannot be guaranteed. The information provided will not be updated any time after the date of publication. 

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