As a retiree, it’s integral for you to know whether your retirement income will be taxed, how much of it will be taxed, and at what rate, so that you can create a budget accordingly and live within your means. In this post, let us take a look at six types of retirement income that are subject to taxation.
Income from 401(k) and traditional IRA accounts
Both 401(k) and traditional IRA accounts are funded with your pre-tax dollars, which means you have to pay taxes on withdrawals. The tax rate depends on the tax bracket you belong to.
Social Security benefits
Technically, your Social Security income in and of itself is not taxable. If you have additional sources of income, commonly referred to as provisional income, you might have to pay taxes on a portion of your benefits, up to 85%.
If your pension account was funded with your pre-tax dollars, you have to pay taxes on your pension income as per the tax bracket you belong to.
Depending on the type of annuity you invested in, you might have to pay taxes on the entire income or a portion of the income.
For instance, distributions from an immediate annuity usually include a portion of the principal as well as the earned interest. You are required to pay taxes only on the earned interest, not the principal.
On the other hand, variable annuities require you to withdraw your earnings first. You can start withdrawing the principal only after you have withdrawn all of your investment gains.
The earnings portion is taxable, which means whatever amount you withdraw will be considered a part of your taxable income. Once you start withdrawing the principal amount, you will no longer have to pay taxes.
Similarly, if your annuity was funded with your pre-tax dollars, the distributions will be considered a part of your taxable income and taxed at your ordinary income tax rate.
Certificates of deposit
A CD could be an investment option for retirees when you want a certain amount of money to become readily available at a specific future date without any risk. Interest payments on CDs are taxable and the tax rate depends on the tax bracket you fall into.
If you own stocks, the dividends paid by the companies can be taxed at long-term capital gains rates or at ordinary income tax rates, depending on whether the dividends in question are qualified or non-qualified.
Generally, if you hold your stocks for a period of 60 days or more, before the dividends are paid or after the dividends are paid, it will be considered a qualified dividend, which means you will be taxed at the long-term capital gains rate, which can be as low as zero in some cases.