Don’t Forget to Plan for Taxes in Your Retirement Budget

dont-forget-taxes-header-imageWith so many variables to think about as a new retiree, it can be easy to overlook one critical factor in your retirement income: taxes.

While tax planning, like financial planning, is highly personal, there are a few things everyone should know about retirement taxes: specifically, the types of taxable income you might be getting in retirement, how to approach calculating your tax rate, and how to manage account distributions.

Read on to learn more.

What constitutes taxable income?

You might be drawing income from any of the following taxable income sources in retirement:1

  • Military retirement pay
  • Social security (may be taxable depending on your income and filing status)
  • Pensions or annuities (all or part may be taxable)
  • Individual Retirement Account (IRA) income (except Roth IRAs)
  • Rental income or income from a part-time job or business
  • Unemployment
  • Gambling
  • Bonuses, awards, and prizes
  • Alimony

Additionally, if you have a pension, your income from it could be fully or partially taxable depending on the way contributions were made.

Examples of non-taxable income, on the other hand, would include veteran’s benefits, disability pay in certain situations, worker’s compensation, and cash rebates from a purchase.

Put all those sources together, and most retirees are subject to some level of income tax. So what’s next?

Get a handle on your tax rate

There are two ways to figure out what your expected tax burden will be: look it up on one of many online calculators or speak to your accountant.

In other words, there’s no one-size-fits-all answer.

Depending on factors like:

  • Where you live
  • Your mix of income sources
  • Your overall income needs
  • Your long-term financial goals

The actual amount of tax you’ll be paying each year will vary — sometimes dramatically.

A good starting point is to look up the federal, state, and local tax rates that apply to your income level. While these aren’t an exact reflection of what you’ll pay, they’ll give you important variables to add into your calculation.

For some, this is enough: your official tax rate will effectively overestimate how much you end up paying, which can put you in for a pleasant experience come tax time.

But there are drawbacks to keeping it simple.

Namely, if you send estimated tax payments, you could end up loaning the government money for free for no reason. The simplification may also make it easier to forget about strategizing — something that could significantly reduce your taxes in a given year.

That’s why it can be very helpful to speak to an advisor who can account for the specifics of your situation. Someone who understands both retirement tax issues and your personal financial situation can help you build a more effective personal tax strategy.


Don’t forget to make the most of distributions

If you’re like many retirees, you might get income from a job, annuity, pension, or even just Social Security, but you may also want or need to draw income from your financial accounts.

One way to help minimize your taxes in a given year is to sequence account distributions in the following way:2

  • Required Minimum Distributions (RMDs)
  • Taxable brokerage accounts
  • Traditional IRAs and 401(k)s
  • Roth IRAs and 401(k)s

The idea is to try to preserve as much money in the accounts that afford the largest long-term tax benefits. Roth accounts offer tax-free growth and withdrawals if certain requirements are met and can be advantageous as a bequeathment to your heirs.

However, rules of thumb aside, it’s a good idea to strategize your income sources from one year to the next depending your reality on the ground. This will help you keep taxes in check and maximize your long-term savings.

Again, this is where an advisor or accountant can really help: an online calculator might be able to give you a tax estimate, but an advisor can help you find the strategy that truly makes the most of your options.

Put taxes in your budget

As you’ve probably noticed, giving blanket advice about how to manage your taxes is difficult: everyone’s different, and that means that what works brilliantly for one person might be very costly for someone else.

The important thing is to keep taxes in mind when planning your retirement income. Whether you do your own research or work with a professional, taxes should be at the forefront of your annual income strategy.

It might not be exciting, but it is important: after all, tax management won’t just save you cash today, it will help you preserve your nest egg for years to come.

Let Us Help!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.


1This Section: Internal Revenue Service. “Tax Guide for the Retiree: Frequently Asked Questions.” and “What is Taxable and Nontaxable Income?”

2 Christine Benz. “Don’t Be Dogmatic About Retirement-Portfolio Withdrawals.” Morningstar, February 19, 2015.

Important disclosures:

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.