Understanding Taxes in Retirement

You likely have a handle on your retirement savings, but do you know what your tax obligations will look like once you retire?

“Not knowing the tax implications of your savings and investments can lead you to underestimate your spending power in retirement,” notes financial advisor Ryan Tucker, who leads BOSS Retirement Solutions. “This is a crucial figure to grasp.”

The Tucker Brothers have aided over 50,000 families in the Wasatch Front with retirement planning. They consistently remind clients that many people tend to overlook or misjudge the taxes they’ll owe during retirement.

“Retirement income typically comes from multiple sources,” Tyson explains. “This includes IRAs, 401Ks, Social Security, interest, dividends, and real estate. Each is taxed differently. If you aren’t careful, you could end up shelling out tens of thousands of dollars in extra taxes annually.”

The Importance of Smart Tax Planning

Many associate tax payments primarily with April 15th. But, by then, it’s often too late for significant savings.

“Filing your taxes on April 15th is merely a review of past financial activity,” Tyson points out. “To lower your taxes in retirement, you need to adopt forward-thinking tax planning strategies. This can lead to substantial savings—not just for one year, but for your entire retirement.”

Interestingly, current tax rates are the lowest they’ve been in four decades, partly due to permanent tax cuts from the Trump administration. However, their longevity is uncertain.

“Meanwhile, our national debt has soared to over $38 trillion. Many experts argue that this isn’t sustainable, and eventually, tax hikes may be the only way to manage this debt,” Ryan adds. “It’s not a question of ‘if,’ but ‘when.’

The Tucker Brothers encourage clients to explore strategic tax planning options that can reveal unexpected savings.

Account Types and Tax Implications

If you’ve invested a substantial amount in traditional IRAs or 401Ks, you’re not alone. However, every dollar you withdraw from these accounts is taxed as ordinary income.

“Think of IRAs and 401Ks as debts to the IRS,” Ryan says. “Without a tailored tax strategy for withdrawals and other income sources, you might end up paying thousands unnecessarily in taxes each year.”

That’s one of the reasons the Tuckers often suggest converting portions of traditional IRAs or 401Ks to Roth IRAs. Paying taxes now, at a lower rate, means you won’t face taxes on that money again in the future. It doesn’t affect your investment amount or involve withdrawing funds.

“Switching from a traditional IRA or 401K to a Roth can significantly lower your lifetime tax bill,” Tyson states. “Plus, Roths don’t require minimum distributions (RMDs), which gives you greater control over your tax situation and can simplify estate planning.”

The Wall Street Journal recently mentioned that converting to a Roth could extend a retiree’s financial portfolio by as much as seven years.

Social Security and Hidden Tax Costs

For many retirees, how Social Security benefits are taxed comes as a surprise. You could be taxed on up to 85% of these benefits.

“Both Social Security and withdrawals from retirement accounts are considered ordinary income. When combined, they can lead to a ‘tax torpedo,’ which means more of your benefits are taxed for each additional dollar of income,” Tyson explains.

This excess income might also hike your Medicare premiums and capital gains taxes, impacting your deductions and exemptions.

“The best strategy is to manage what you can, focusing on how and when you withdraw money,” Ryan emphasizes.

By fine-tuning withdrawal strategies and timing, you might effectively reduce or even eliminate taxes on your benefits.

Common Taxable Sources of Retirement Income

The reality is nearly all retirement income sources—whether from investments or pensions—can have tax implications that chip away at your savings. Some other common taxable income sources are:

• Dividends and Investments: Qualified dividends face capital gains tax rates (up to 20%), while non-qualified dividends may reach up to 37% as ordinary income. Future tax hikes could make these even steeper.
• CDs and Money Markets: Interest from CDs, savings, and money market accounts are taxed as ordinary income.
• Pensions and Annuities: While annuities provide steady income and protect against market fluctuations, qualified annuities funded with pre-tax dollars get taxed as ordinary income upon withdrawal.

Discover Potential Tax Savings

If you have more than $300,000 saved for retirement, you’re likely facing potential tax issues. To evaluate your options and uncover how much you could save, BOSS Retirement Solutions offers a personalized retirement tax analysis.

If you’re not a client, there’s no cost for this analysis.

“This is just a chance to assess your current tax trajectory and how strategic planning could save you money,” Ryan explains.

“There’s no pressure—we’re just providing information. The process is straightforward, and you may be surprised at the savings we can uncover. It’s common for us to find six-figure tax savings in retirement,” Tyson adds.

To arrange a complimentary analysis, you can call (801) 990-5055.