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Planning for taxes when taking distributions can be as important as managing the retirement income sources themselves. The information below is a very basic discussion and is not meant as individual planning advice. Please schedule an appointment with our financial planning professionals to discuss a suitable tax management plan for using your retirement assets.
Every employee in this country is working towards one universal goal; retirement. Those who are successful have a nest egg of assets in different places to rely on to pay for the needs and the wants of retirement.
The contents of that nest egg can include:
Investments in non-retirement accounts that can generate
profits and dividends from stocks
Taxes may be applied differently to each of the items listed above and may impact how much your monthly Medicare Part B premiums are from year to year. Let’s look at some of the different ways retirement income sources are taxed.
Traditional IRAs, 401(k)s and 403(b)s
Distributions made after age 59 ½ of previously untaxed money from those plans are fully taxable as ordinary income at the federal level. Ordinary income tax rates range from 10% to 37%.
Large lump sum distributions from a traditional type IRA/401k/403b can push you into a higher tax bracket. They can result in higher Medicare Part B and Part D premiums the following year.
Unlike Traditional IRAs, withdrawals from Roth’s are federally income tax free as long as the owner of the Roth is over 59 ½ and has held money in a Roth for more than 5 years.
Retirees lucky enough to have a traditional pension may be surprised to learn that pension income benefits are fully taxable as ordinary income at the federal level. State tax rules vary, with some excluding a portion of various types of retirement income from taxes and others exempting pensions altogether.
A portion of Social Security benefits are tax-free at the federal level, but once “combined income,” defined as adjusted gross income plus one-half of Social Security benefits plus tax-exempt interest, exceeds certain thresholds, some benefits are taxable at ordinary income tax rates.
For single taxpayers, up to 50% of Social Security benefits are taxable if combined income is between $25,000 and $34,000 and up to 85% of benefits are taxable when combined income exceeds $34,000. For married couples, up to 50% of Social Security benefits are taxable when combined income is between $32,000 and $44,000 and up to 85% of benefits are taxable once combined income exceeds $44,000. Most states do not tax Social Security benefits.
If you claim your Social Security Retirement benefits before your Full Retirement Age and you are still working, you must be aware of the Earnings Limit. It you exceed the limit, a portion of your Social Security benefit may be recaptured.
Investment gains and dividends
Gains on the sale of stocks, bonds, mutual funds and exchange traded funds (ETF) held for more than a year are taxed at the preferential long term capital gains rates. “Qualified Dividends” received on stocks, mutual funds and ETFs are also taxed at long term rates. Long term capital gains tax rates range from 0% to 20%.
There are many different types of annuities. However, the taxation of money you receive from an annuity will follow the same rule.
Any money received that has not been previously taxed is taxable at ordinary income tax rates.
Annuities may pay out taxable earning first and in full before the cost basis/principal, which would not be subject to taxes, is paid out.
The appeal of investing in municipal bonds is that the interest is tax-free at the federal level. For bonds issued in the taxpayer’s home state interest is generally income tax free at the state level, too.
The reality of municipal bonds is that the net interest after taxes may be lower than a comparable taxable bond.
Nontaxable muni bond interest can result in higher Medicare premiums.
Medicare taxes and surcharges
High-income taxpayers are subject to special taxes that help fund Medicare. If net investment income exceeds $200,000 for single individuals or $250,000 for married taxpayers, they will pay an additional 3.8% tax, boosting the maximum capital gains rate as high as 23.8% (20% + 3.8%).
Working taxpayers must pay an additional 0.9% in payroll taxes to help fund Medicare if their earned income exceeds the $200,000/$250,000 thresholds.
High-income Medicare beneficiaries also pay larger monthly premiums for Part B and D when their modified adjusted gross income tops $85,000 for singles and $170,000 for married couples.
The income based schedule of Medicare Part B premiums is available here: https://www.medicare.gov/your-medicare-costs/part-b-costs
The income based schedule for Medicare Part D premiums is available here: https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/monthly-premium-for-drug-plans
La Plata, MD 20646
Disclosure     Form CRS      The Investment Center Inc
All securities offered through The Investment Center, Inc. Member FINRA/SIPC Advisory services provided through IC Advisory Services, Inc. – An SEC Registered Investment Advisor Wealth Management Partners is not affiliated with The Investment Center, Inc. or IC Advisory Services, Inc. Robert Ramos and Joyce Cool are registered representatives of The Investment Center, Inc.