Elder Planning – What Taxes Will I Have to Pay When I Retire?

To most, retirement seems like a final destination; you’ve worked your entire adult life and you finally have a chance to sit back, relax and enjoy the rest of your days, living as stress-free as possible. While this vision of retirement may very well be true for many people, unfortunately, as with nearly all financial matters, paying taxes simply cannot be avoided. Below we’ve outlined some key taxes that you may have to pay either during or throughout your retirement.

Taxes In Retirement

Social Security Taxes

Everyone’s heard of social security, though unfortunately, not everyone is aware of and expects to pay taxes on their social security money. Luckily, if you’re only source of retirement income is what you receive from social security, you likely won’t owe any taxes during retirement. However, if you find yourself living off of another income, odds are a portion of your social security money will be taxed. The amount of your social security that may be taxed depends entirely on how much “combined income” you or you and your spouse bring in. Depending on that sum (and your state), you can pay anywhere from 15 to 45 percent on 85 percent of your social security benefits. New York currently does not tax social security benefits, and any other income brought in is deductible up to $20,000.

IRA and 401(k) withdrawals

Another tax that you may owe throughout retirement is on withdrawals made from retirement accounts such as IRAs or 401(k)s. Since withdrawals must be reported on your tax return as taxable income, you’ll have to pay a percentage of each withdrawal as tax, which people are usually aware of when they set up these types of tax-advantaged accounts. As always, the tax liability on your withdrawals depends on your total income, deductions, and the tax bracket in which you find yourself.


There is an easy way of seeing if pension tax will be taxed; if it went in before tax when the individual withdrew, it would be taxed. Since these pension accounts are funded with pre- tax income, the amount of annual pension income will be included on your tax return as taxable income each year. If this occurs, you can ask that taxes be withheld from the pension check directly. If some of the pension was funded with after-tax dollars then each year, a portion of the pension income will be taxable and a portion will not.


If you’re over the age of 65, odds are you either have or know of annuities, which are annual distributions of money paid to an individual, usually for the rest of their life. Unfortunately, financial products don’t escape the wrath of taxation. If an annuity is owned by an IRA or other type of retirement account, then taxes on IRA withdrawals will apply to any annuity payments that the individual receives from the annuity. If the annuity was purchased with after tax dollars, then the tax rules that apply depend on what type of annuity the individual purchased.

Home sales taxes

Moving to a new house or community can also generate an unanticipated tax bill. Fortunately, if you decide to sell your property and you’ve lived in your primary residence for at least two of the five years prior to the sale, you may be able to be exempt from taxes up to a certain percentage of the sale profits. Profits that are above a certain amount though will be subject to capital gains rates that often can go as high as 20%.

Investment Income

Taxes on dividends, interest income, or capital gains must also be paid as they were prior to retirement

There are various ways to help avoid large taxes during your retirement.

  1. The easiest way to trim your retirement tax bill is to put your money in a Roth IRA. Your contributions as well as the money you earn in that account will come out tax-free.
  2. Another option is to open an HSA; this usually only applies to individuals with high-deductible insurance plans. If the health plan meets the guidelines of the IRS, the individual can open a health savings account which allows money to be put in pre-tax, grow tax-deferred and as long as you spend the money on qualified health costs, you never pay taxes on it.
  3. Another way to help trim tax in retirement is to pay off your mortgage and reduce living expenses. The less you need to withdraw from retirement accounts that require taxes on withdrawals, such as traditional IRAs and 401(k)s, the lower the tax bill.
  4. Consider investing in municipal bonds. Generally municipal bonds are tax-exempt, meaning you wont owe federal tax on the income you receive.
  5. If you have an IRA or 401(k) and a Roth IRA or Roth 401(k), then one way to control your taxes is to manage your withdrawals in retirement.

Your Taxes May Be Less Than You Think

While there’s no avoiding a tax bill during retirement, it’s certainly useful to know that your taxes may not be as high as you may imagine. One key point to keep in mind is that since you are no longer part of the workforce, any applicable tax rates apply solely to your pensions income, taxable retirement account withdrawals, and any additional income from businesses or other jobs. As mentioned earlier, social security income will only be partially taxed if taxes at all. Withdrawals from your Roth IRA will also be tax-free if you’ve had the account for at least five years or are over the age of 59 ½ . As usual, accessing any funds in your savings will also be tax free.

If you know that you live in a relatively high-tax state and you find it to be a major issue, it’s a good idea to have a family discussion about moving to a tax-friendly state such as Texas, Florida or Nevada which don’t tax income at all. To ensure that you are all set for the final stage of your life, we highly recommend you consult with a licensed estate planning attorney as well as a financial advisor to get all your documents in place for a smooth transfer of assets and a strategy to minimize your tax bill during retirement.