Understanding Retirement Taxes

While you might have a good grasp of your retirement savings, how well do you understand the taxes you’ll face when you retire?

“You can’t truly know how much you can spend in retirement if you’re uncertain about your tax obligations on those savings and investments,” says Ryan Tucker, a financial advisor and president of BOSS Retirement Solutions. “This is a critical figure to be aware of.”

The Tucker Brothers have assisted over 50,000 families in the Wasatch Front in preparing for retirement. Each year, they highlight how many individuals underestimate the taxes they’ll be responsible for once they stop working.

“Retirement income typically doesn’t come from just one place,” Tyson explains. “It’s often a mix of various sources like IRAs, 401Ks, Social Security, dividends, and real estate. The tricky part is that each of these is taxed differently. If you’re not careful, you might pay thousands more in taxes than necessary every year.”

The Benefits of Smart Tax Planning in Retirement

For most people, tax season feels like it peaks around April 15th, but, by then, it’s really too late to make substantial savings.

“When you file taxes each April, you’re accounting for what’s already happened,” Tyson points out. “To lessen your tax burden in retirement, you need proactive tax strategies. This approach can lead to substantial savings—not just for one year but throughout your retirement.”

Believe it or not, we’re experiencing some of the lowest tax rates in 40 years, partly due to tax cuts made during the Trump era. But there’s no assurance these rates will stick around forever.

“Our national debt is over $38 trillion, which many economists think is a problem waiting to happen. So, it’s not a matter of ‘if’ taxes will rise, but rather ‘when’,” Ryan adds. The Tucker Brothers encourage their clients to capitalise on tax planning strategies that could lead to unexpected savings in retirement.

High-Tax Accounts in Retirement

If you have a large chunk of your retirement savings in a traditional IRA or 401K, you’re in good company. Keep in mind, every dollar you take out from these accounts in retirement is taxed as ordinary income.

“Think of IRAs and 401Ks as liabilities to the IRS,” Ryan explains. “Without a clever tax strategy for withdrawing from these accounts or for Social Security, you could end up overpaying taxes by tens of thousands each year.”

That’s why the Tuckers often suggest converting part of your traditional IRA or 401K to a Roth. By doing a Roth conversion, you pay taxes now at a discounted rate and won’t owe taxes on that amount again. It’s not about pulling out more money, just about managing your tax bill.

“Switching to a Roth can significantly lessen the total taxes you pay throughout your retirement,” Tyson explains. “Plus, Roth accounts don’t require minimum distributions (RMDs), which means more control over your retirement taxes and easier estate transfer.”

The Wall Street Journal highlighted that the Roth conversion “could lead to tax savings that might extend a retiree’s portfolio by up to seven years.”

Social Security and Hidden Tax Challenges

Many retirees are often surprised by how Social Security benefits are taxed—up to 85% of your benefits could be subject to taxes.

“Withdrawals from Social Security, IRAs, and 401Ks are classified as ordinary income. Combining these can lead to a ‘tax torpedo,’ which means that as your income rises, a larger portion of your benefits becomes taxable,” Tyson shares.

This extra income could also hike up your Medicare premiums and capital gains taxes, affecting your deductions.

“Managing what you can is essential, which means being smart about how and when to withdraw your income,” says Ryan.

By adjusting withdrawals from IRAs, timing your Social Security, and considering Roth conversions, you might reduce or even eliminate taxes on your benefits.

Other Taxable Income Sources in Retirement

The reality is that almost every source of retirement income, from investments to pensions, comes with tax implications that can erode your savings over time. Other common taxable sources include:

• Dividends and Investments: Qualified dividends are subject to capital gains rates (up to 20%), whereas non-qualified dividends are taxed as ordinary income (up to 37%). Both could cost you more if tax rates increase.
• CDs and Money Markets: Any interest earned from CDs or money market accounts is taxed as ordinary income.
• Pensions and Annuities: While annuities provide lifetime income, most qualified annuities are taxed as ordinary income when withdrawn.

Evaluating Potential Tax Savings

If your savings exceed $300,000, you might face tax challenges in retirement. If you’re interested in exploring your options and estimating possible savings, BOSS Retirement Solutions offers personalized retirement tax analysis.

There’s no cost for this analysis if you’re not a client.

“This is your chance to see what you could be paying in taxes based on your current route and how much you might save with strategic tax planning,” Ryan says.

“It’s completely up to you. We’ve streamlined the process, and you may be surprised at the potential savings. It’s not uncommon for us to uncover six-figure tax savings in retirement,” Tyson adds.

To arrange your free tailored analysis, you can call (801) 990-5055 or visit the appropriate link.