Navigating sources of retirement income can be overwhelming. Especially when it comes to understanding taxable retirement income. When I was a practicing nurse, I didn’t think about retirement income. I guess I thought I would never retire. But as a Financial Advisor, not outliving money and taxable retirement income are of great concern among clients. In this article, we’ll explore taxable retirement income to help you with your financial plan.
What is Taxable Retirement Income?
When you retire, you’ll likely have income from various sources. These sources may include Social Security benefits, an employer retirement account or pension, or annuities. It is important to know the tax rules for each source to avoid penalties. But not all retirement income is taxable. Here are some common sources of taxable retirement income.
Pension Payments
Pension payments are generally subject to federal tax. And the income tax you’ll pay will depend on your total amount. However, not all states tax pension payments. And tax rules vary if you move to another state. A tax professional can help you navigate the rules for your state.
401(k), 403(b) and Qualified Individual Retirement Account (IRA) Withdrawals
Withdrawals from your 401(k), 403(b) or traditional IRA are typically taxable income. These accounts are generally funded with pre-tax dollars, so tax is due when you take it out.
Roth Individual Retirement Account (IRA) Withdrawals
Roth IRA’s are funded with after-tax dollars. This means withdrawals are tax-free if you meet certain withdrawal rules.
Annuity Payments
If you bought an annuity with pre-tax dollars, the payments you receive in retirement are usually taxable. However, if you used after-tax money to buy the annuity, a portion of the payments may be tax-free. For example, you generally won’t owe income tax on the amount your contribution with after-tax dollars. But you most likely will owe tax on the gains.
Earnings from Part-Time Work
If you continue to work part-time in retirement, the income you earn is taxable. This includes income from nursing or any other part-time job.
Social Security Benefits
Depending on your total income, a portion of your Social Security benefits may be taxable. The exact taxable amount is determined by your provisional income. This includes half of your Social Security benefits, plus your other income.
How to Plan for Taxable Retirement Income
Understanding what’s taxable and what’s not is important for planning your retirement. Here are a few tips to help you prepare:
Estimate Your Retirement Expenses
Having a clear picture of your expected expenses in retirement can help you decide how much taxable income you’ll need to cover your costs.
Diversify Your Retirement Savings
Consider having a mix of taxable and tax-advantaged accounts. This can give you flexibility in managing your taxes in retirement.
Stay Informed About Tax Law Changes
Tax laws can change often. And it is important to know how the changes might impact your retirement income. Consider speaking with a tax professional or Financial Advisor to help you stay on top of these changes.
Explore Tax-Efficient Withdrawal Strategies
There are various strategies for withdrawing money from your retirement accounts in a tax-efficient manner. For example, you might consider coordinating withdrawals from different account types to lessen your tax burden. Your tax professional or Financial Advisor may have other strategies that align with your goals.
In conclusion, understanding the tax rules for your retirement income is important to avoid penalties. Staying aware of taxable retirement income can help you make decisions about saving, investing, and managing your money. If you have specific questions about your own retirement situation, don’t hesitate to reach out for personalized guidance.
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Georgene Collins, RICP®, RN, PhD, MBA is a registered nurse turned Financial Advisor at Airey Financial Group. Georgene helps other nurses take control of their finances and prepare for retirement. Georgene began her career with Airey Financial Group in 2017 after retiring from 30 years in healthcare.
Georgene holds the Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services. She holds health and life insurance licenses and a long-term care certificate in Indiana, Illinois, and Wisconsin. Georgene is a Registered Representative and Investment Advisor Representative and has earned the FINRA Series 63 and 65 registrations.
