Will You Pay Taxes During Retirement?

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Will You Pay Taxes During Retirement?

You’ve saved for retirement via an individual retirement account (IRA) and a 401(k) plan if you’ve been diligent. And you’re aware that you’ll get extra money from Social Security or a pension. But what does all of this entail for your tax bill when you retire?

Your tax obligation in retirement is determined by a few key criteria, most notably your:

  • Filing status
  • Retirement income sources
  • Total annual income

As a result, your annual tax bill will have an impact on how much money you have to spend for day-to-day costs.

However, it is critical to understand how your retirement income will be taxed. If you’re still working, this information might help you prepare for the future. If you’ve already retired, you may need to account for other sources of income to ensure that you don’t run out of money. Understanding how taxes will effect your retirement income might help you think about strategies to reduce your tax payment while increasing your retirement income.

Key Takeaways

  • Depending on your overall income and filing status, up to 85% of your Social Security payments may be taxed.
  • Generally, distributions from 401(k) and conventional IRA funds are taxed.
  • Roth IRA distributions are tax-free.
  • Even if you receive Social Security benefits, you must pay Social Security and Medicare taxes if you are working or self-employed.
  • The federal tax code, as well as several state legislation, give specific advantages to retirees and senior citizens.

How Is Social Security Taxed in Retirement?

If Social Security is your only source of income during retirement, there’s a strong possibility you won’t owe taxes on it. This is due to the fact that your income will be too little to be taxed. However, if you have other sources of income, such as ordinarily tax-free interest income, a part of your Social Security payments may be subject to taxation.

More over half of Social Security recipients pay some kind of tax on their payments. In 1984, fewer than 10% of households receiving Social Security payments had to pay income taxes on them; by 2015, the figure had risen to more than 50%. According to the Social Security Administration, this number might grow to 56% between 2015 and 2050. (SSA).

The amount of your taxable Social Security payments is determined by your total income, which is the sum of:

  1. 50% of your total Social Security income for the year year
  2. The adjusted gross income (AGI) is your total income less any adjustments, such as deductions and exclusions.
  3. Interest income that is not taxable, such as interest on municipal bonds

Wages, salaries, tips, interest, dividends, IRA/401(k) payouts, pensions, and annuities are all common sources of gross income. Contributions to health savings accounts (HSAs), IRA contributions, student loan interest deductions, and contributions to self-employed retirement plans are all common adjustments to gross income.

  2023 Social Security Tax Limit

The amount of your combined income influences how much of your Social Security payments are taxed. The figure below shows the proportion of your Social Security payments that will be taxed at various levels of combined income:

Combined IncomeTaxable Portion of Social Security
Individual Return
$0 to $24,999No tax
$25,000 to $34,000Up to 50% of SS may be taxable
More than $34,000Up to 85% of SS may be taxable
Married, Joint Return
$0 to $31,999No tax
$32,000 to $44,000Up to 50% of SS may be taxable
More than $44,000Up to 85% of SS may be taxable
Married, Separate Return
$0 and upUp to 85% of SS may be taxable

How Much Income Can a Retiree Receive Without Paying Taxes?

This is determined by many criteria, including your source of income and the overall amount you get. Distributions from 401(k)s and IRAs, Social Security benefits, pension payments, and annuity income are all possible. Some individuals may continue to make money from work, either as an employee or via self-employment, even after they have retired from their regular or long-term job.

Unearned Income

Unearned income may be taxed and subject to varied tax laws. Finally, a retiree’s tax burden is determined by their tax bracket:

  • Depending on your total yearly income, distributions from a conventional IRA (to which you claimed deductions for contributions) may be taxable.
  • Taxable distributions from a 401(k) plan or other qualified retirement account financed with pre-tax contributions

Your income from these retirement plans, as well as your earned income, is taxed as ordinary income at rates ranging from 10% to 37%. Additionally, if you have an employer-funded pension plan, that income is taxed as well.

Distributions from plans financed with after-tax contributions are not taxed in the same manner that pre-tax contributions are. Form 1099-R, which is provided to taxpayers who made after-tax contributions to plans, provides both the gross and taxable amount disbursed.

Beneficiaries of IRAs, 401(k)s, and similar plans are obliged to receive yearly required minimum distributions (RMDs) commencing the year they reach 72. In response to the pandemic, the RMD requirement was delayed for the 2020 tax year, but was resumed for 2021.

Dividends, rentals, and taxable interest earned from assets kept outside of IRAs, 401(k)s, and similar plans are taxed at regular income rates of up to 37%. Capital gains taxes are levied on profits made on the sale of investments. Long-term capital gains are taxed at low rates ranging from zero to 20% for individuals with very high taxable incomes.

  Value-Added Tax (VAT) Definition

Distributions from Roth IRAs and Roth 401(k)s are not taxed. Roth plans do not have an RMD requirement since they are financed with after-tax monies.

Earned Income

While unearned income, such as income from pensions, IRAs, annuities, and other assets, is taxed according to regulations that vary depending on the source of the income, earned money works a bit differently. Social Security, Medicare, and income taxes apply to all earnings from traditional job and self-employment.

If you get Social Security benefits and continue to work and earn money, you must pay Social Security and Medicare taxes on that money. However, if your total income (the sum of your earned, unearned, and Social Security payments) is low enough, you will not have to pay federal income tax on it. Your federal income tax payment is likely to be nil if your AGI is equal to or less than the standard deduction for your filing status.

The tax bracket that corresponds to their total taxable income determines the tax rates and responsibilities for older persons with earned and unearned income. In retirement, you establish your tax bracket in the same manner you did while working. Add up your taxable income, subtract your standard or itemized deductions, apply any tax credits you’re entitled for, and consult the tax tables in the Form 1040 and 1040 SR instructions. All of this information may potentially be entered into a tax software application or given to your accountant.

Standard Deductions for Retirees

The 2021 standard deductions are applied to tax returns filed in 2022. The standard deduction for single taxpayers and married taxpayers filing separately in 2021 is $12,550, $25,100 for married taxpayers filing jointly, and $18,800 for heads of household. For the 2022 tax year, the standard deduction for married couples filing jointly rose to $25,900, from $12,950, and from $19,400 for heads of households.

Taxpayers 65 and older (whether or not retired) are eligible for an additional standard deduction of $1,700 in 2021 ($1,750 in 2022) if they are single or heads of household (and not married or have a surviving spouse) and an additional $1,350 in 2021 ($1,400 in 2022) per senior spouse if they are married filing jointly, married filing separately, or a qualified widow (er).

Standard Deductions for Taxpayers Age 65 or Over, Tax Year 2021
Filing StatusStandard DeductionSenior BonusTotal Deduction
Single$12,550$1,700*$14,250
Married filing jointly or qualified widow(er)$25,100$1,350 per senior spouse$26,450 or $27,800
Married filing separately$12,550$1,350$13,900
Head of household$18,800$1,700*$20,500

Standard Deductions for Taxpayers Age 65 or Over, Tax Year 2022
Filing StatusStandard DeductionSenior BonusTotal Deduction
Single$12,950$1,750*$14,700
Married filing jointly or qualified widow(er)$25,900$1,400 per senior spouse$27,300 or $28,700
Married filing separately$12,400$1,400$13,800
Head of household$18,650$1,750*$20,400

* If there is no surviving spouse, $1,350 in 2021 and $1,400 in 2022.

  How Tax-Loss Harvesting Works for Average Investors

You will not owe any taxes if your taxable total income is less than these figures. You are not required to submit a tax return (unless you are married filing separately), but you may like to do so regardless. Filing a return lets you to claim any credits that you may be entitled to, such as the tax credit for the aged and handicapped or the earned income credit. Filing a return also assures that you get any refunds that are due to you.

Taxpayers who itemize deductions are not permitted to claim the basic deduction or the bonus amounts. Because of recent increases in the standard deduction amounts, the point at which older taxpayers profit more from itemizing than than taking the standard deduction has risen. These higher levels may influence when you make charitable contributions or pay other deductible costs. If you can combine big itemizable costs into a single tax year, you may be able to gain from itemizing in certain years.

Tax Brackets for 2021 and 2022

The tax rates and brackets for the 2021 and 2022 tax years are shown below, depending on filing status and income criteria.

Tax Brackets, 2021
2021 RateMarried Joint ReturnSingle IndividualHead of HouseholdMarried Separate Return
10%$19,900 or less$9,950 or less$14,200 or less$9,950 or less
12%$19,900 to $81,050$9,951 to $40,525$14,201 to $54,200$9,951 to $40,525
22%$81,051 to $172,750$40,526 to $86,375$54,201 to $86,350$40,526 to $86,375
24%$172,751 to $329,850$86,376 to $164,925$86,351 to $164,900$86,376 to $164,925
32%$329,851 to $418,850$164,926 to $209,425$164,901 to $209,400$164,926 to $209,425
35%$418,851 to $628,300$209,426 to $523,600$209,401 to $523,600$209,426 to $314,150
37%Over $628,300Over $523,600Over $523,600Over $314,150

The marginal tax rates for 2022 remain same, while the amount of taxable income that applies to each rate rises. Income exceeding $539,900 for individuals and heads of household, and $647,850 for married couples filing jointly, will be subject to a 37% tax rate.

Tax Brackets, 2022
2022 RateMarried Joint ReturnSingle IndividualHead of HouseholdMarried Separate Return
10%$20,550 or less$10,275 or less$14,650 or less$10,275 or less
12%$20,551 to $83,550$10,276 to $41,775$14,651 to $55,900$10,276 to $41,775
22%$83,551 to $178,150$41,776 to $89,075$55,901 to $89,050$41,776 to $89,075
24%$178,151 to $340,100$89,076 to $170,050$89,051 to $170,050$89,076 to $170,050
32%$340,101 to $431,900$170,051 to $215,950$170,051 to $215,950$170,051 to $219,950
35%$431,901 to $647,850$215,951 to $539,900$215,951 to $539,900$215,951 to $323,925
37%Over $647,850Over $539,900Over $539,900Over $323,925

The Bottom Line

Will you be required to pay taxes in retirement? Unless your taxable income is equal to or less than the standard deduction amount each year, you almost certainly will. What you’ll pay is a different thing. There are several strategies available to assist retirees in reducing their tax burden. Timing distributions, bunching income, bunching itemized deductions, and converting retirement accounts are all strategies.

Investopedia asks authors to back their work with original sources. White documents, government statistics, original reporting, and interviews with industry experts are among them. Where necessary, we also cite original research from other credible publications. You can read more about the guidelines we use to provide accurate, balanced material on our website.

editorial policy.
  1. Internal Revenue Service. “Don’t Forget, Social Security Benefits May be Taxable.”

  2. Social Security Administration.“Retirement Benefits,”

  3. Social Security Administration. “Retirement Benefits, 2022.” Pages 12-13.

  4. Social Security. “Income Taxes And Your Social Security Benefit.”

  5. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  6. Internal Revenue Service. “About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.”

  7. “Retirement Plan and IRA Required Minimum Distributions FAQs,” Internal Revenue Service.

  8. “Topic No. 409 Capital Gains and Losses,” Internal Revenue Service.

  9. Internal Revenue Service. “Roth Comparison Chart.”

  10. “Publication 554: Tax Guide for Seniors,” Internal Revenue Service, page 12.

  11. Internal Revenue Service (IRS). “The Internal Revenue Service Provides Tax Inflation Adjustments for Tax Year 2021.”

  12. Internal Revenue Service. “RP-2021-45,” Page 14.

  13. “Credits and Deductions for Individuals,” Internal Revenue Service.

  14. Internal Revenue Service (IRS). “The Internal Revenue Service Provides Tax Inflation Adjustments for Tax Year 2021.”

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