Two words that you never want to hear together are taxes and retirement. It’s a constant in life that we will have to pay taxes. Even in retirement, when we’re living the good life, we will still have to contribute to society. Taxes are stressful and complicated most of the time, but that doesn’t have to always be the case. Taxes change and adjust for our new, retired lives. Knowing how the system around these retirement taxes works can help afford us some peace-of-mind.
Social Security Tax
So, we know that we’ll be taxed in retirement, but what does that look like? The experts at Investopedia.com offer a detailed breakdown of how retirement taxes work in 2022. Retirement taxes are complex, but also relatively straight-forward. Let’s start with Social Security. Social Security is taxed, depending on your situation. Your “combined income,” or the sum of your benefits, adjusted gross income, and tax-exempt interest income, is determined by the SSA. If that sum is in or above the SSA’s specified range, then you will be required to pay taxes on your benefits.
Retirement Account Tax
Next, let’s try to understand how other retirement accounts are taxed. Pension plans, 401ks, and IRA accounts are taxed depending on your total income. These plans are classified as “unearned” income but might still require income tax. Claimed tax deductions on contributions to retirement accounts like 401ks and IRAs can be taxable. Contributions that weren’t claimed tax deductions are still taxed, but not to the same extent.
Your tax liability relies heavily on your tax bracket. Your total income, from all earned income and “unearned” income places you in a specific tax bracket. Standard deductions for 2021 single filers ranged around $12,550 while joint filers ranged around $25,100. The highest tax rate for 2022 is 37 percent for individuals making over $539,000 and couples making over $647,850.
Taxes and Retirement
When it comes time to try and figure all these retirement taxes out, the best option is to use a professional. Understanding how your retirement accounts are taxed will directly help your financial planning and can give you some insight into whether your Social Security benefits will be taxed as well. A professional financial planner or accountant can help seniors strategically lower and manage their retirement taxes. That way, we can have the peace-of-mind to enjoy our retirement, and not have to worry about paying too much.
The Council for Retirement Security is putting its best foot forward to protect the Social Security Trust. By ensuring the Trust’s future, regardless of tax brackets or benefit amounts, Social Security will still be able to be paid out in full.