6 Ways You Could Be Taxed in Retirement

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Planning on retiring? A common misconceptions is that your tax burden will decrease compared to the amount you paid during your working years. Several post-retirement income sources will determine the size of your tax bill.

1. Traditional IRA or 401(k) withdrawals
Traditional IRAs and 401(k)s offer an immediate tax break for contributing, as well as tax-deferred growth on your money, but once you enter retirement, the withdrawals are taxed as ordinary income — the highest possible rate. Consider saving in a Roth IRA or 401(k) or converting your existing savings to a Roth-style account. If you do decide to convert, you will incur a tax liability when the conversion is made.

2. Social Security benefits
“Seniors who collect Social Security and don’t have much other income can often avoid taxes on their benefits. But if you have other income sources, such as savings or a part-time job, there’s a good chance your Social Security benefits will be taxed,” WFMY News reported.

3. Pension income
Payments made from retirement pensions — from the government and private sector — are generally taxed as ordinary income. However, some military or disability pensions might be partially or completely tax-free.

4. Investment gains
Investment gains are taxable in retirement, assuming such assets are not held in a qualified retirement account.

5. Investment income
Dividend and interest income is generally taxable, although qualified dividends are taxed at a more favorable rate. Most dividends fall into this category.

6. Bank account interest
Bank account interest is also taxed as ordinary income at the highest possible rate.

Be certain to check with your financial adviser about how you might be impacted by taxes during retirement so you can avoid unexpected financial hardships courtesy of Uncle Sam.

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