The Effect of Retirement on Taxes

Tax on retirement income can have a significant impact on how well your assets support your desired standard of living once you leave the workforce. The Internal Revenue Service (IRS) affords many benefits related to senior taxes. However, taxes on retirements accounts mean you should consider when and how much to withdraw to avoid paying significant tax on your retirement income.

Social Security Taxes

You may need to pay federal income taxes on your Social Security benefits. This retirement income tax usually happens if you have other substantial income -- wages, self-employment, interest, dividends and other taxable income. If you file a federal tax return as an individual and your total income is more than $25,000, you will have to pay federal taxes. If you file a joint return, you will have to pay taxes if you and your spouse have a total income that is more than $32,000.

IRS Rules On Retirement Accounts

The Government taxes distributions from a traditional IRA at your current ordinary income tax rate. You will have to take distributions by the time you reach 70 ½, though you more than likely will be in a different tax bracket by then reducing your tax liability. If you have money in a Roth IRA, for which you did not get a tax deduction, your earnings are tax -free when you withdraw them. Furthermore with a Roth IRA, you don’t need to take minimum distributions after age 70½.

Tapping Your Taxable Accounts

You may want to consider tapping your taxable accounts before your IRA. You will still owe taxes on any capital gains you realize from the sale of your investment assets, but your rate will be most likely lower than your current income tax rate. (Through the end of 2010, there is a new zero percent tax rate on long-term capital gains for individuals who are in the 10 to 15 percent marginal tax brackets. After 2010, the capital gains taxes will increase to at least 15 percent).

State and Local Taxes

Where you live after retirement can have an impact on your after-tax senior income. Some states like Florida and Texas don’t have a state income tax, which makes them attractive for senior retirement in addition to having generally warmer climates. Other states like California have the highest state income tax.