Keep Your Eye on the Ball: Tax Tips for Retirees

Sure, retirement is a time when many start taking life at a different pace: taking more time for themselves, their families and friends, and the things they care most about. But just because you’re retired doesn’t mean that Uncle Sam has forgotten about you—or the taxes on your income. Though the makeup of your income is probably different than when you were actively working, there are still some things you can do to keep more of your hard-earned retirement income for yourself. Here are a few helpful tips.

  1. 1. Taxation of Social Security benefits. Depending on your other income, a portion of your Social Security income benefit is non-taxable. For 2023, if your adjusted gross income (AGI) plus half of your Social Security benefit is $25,000 or more ($32,000 for married couples filing jointly), you will pay regular income tax on 50% of your Social Security income. The percentage of Social Security income that is taxable goes up along with your total income, to a maximum of 85% (at $34,000 for single filers, $44,000 for couples).
  1. Limit income from traditional IRAs, 401Ks, and 403Bs. Because the money in these plans has not been taxed (you got a reduction in taxable income when you made your contribution to the plan), it will be taxed as ordinary income when you take distributions in retirement. Whenever possible, limit how much you withdraw from such plans to the required minimum distribution (RMD) for each year, or to the amount needed to provide adequate income.
  1. Utilize your Roth IRAs. Unlike traditional IRAs, Roth IRAs have no RMDs, and because taxes were paid on the funds when they were deposited, withdrawals are tax-free. Not only that, but because of their after-tax nature, qualified Roth IRA withdrawals don’t count as “other income” with respect to taxation of Social Security benefits. Because of these advantages, some taxpayers convert traditional accounts to Roth IRAs. However, you need to understand that amounts converted from traditional to Roth accounts require taxes to be paid on the converted amounts at the time of conversion, so be sure to consult your tax advisor before making the conversion. By the way, like Roth IRAs, Roth 401K and 403B plans also allow tax-free qualified withdrawals.
  1. Know your RMDs. For traditional retirement accounts, Roth 401Ks, and Roth 403Bs, you are required to take minimum distributions each year, beginning when you are 73 (72 if you were born in 1950 or earlier). If you fail to take the required distribution, you will pay a 25% excise tax on the amount not withdrawn. Alternatively, if you correct the error within two years, you will pay only a 10% excise tax.
  1. Have a tax-efficient withdrawal plan. For retirees with multiple sources of income, it’s important to think carefully about where your income is coming from, in terms of taxation. Many tax professionals suggest withdrawing from taxable sources first (regular brokerage and banking accounts), then tax-deferred accounts (annuities and traditional retirement accounts), and saving tax-free sources (Roth plans) until last. However, because of growth in their accounts and other factors, some retirees may find themselves anticipating being in a higher tax bracket in future years than presently, so it may make sense to shift more income to taxable sources now, when the tax bill may be lower. It’s important to consult with your tax and financial advisors to develop a withdrawal strategy that makes the most sense for your individual situation.

At Mercer Advisors–Empyrion Wealth Management, we help thriving retirees make the most of their retirement income strategies. To learn more or receive a free “second opinion” on your investments and financial plan, click here.


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