Taxes and Retirement – Are You Prepared for the Consequences of Taxation?

The old saying that you can never avoid death or taxes is still true today. Being prepared for the consequences of taxation on your retirement accounts and estate can help you maximize your wealth and legacy.

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Taxes and Retirement – Are You Prepared for the Consequences of Taxation?
7 Min Read February 22nd, 2022 Updated:March 9th, 2022

Back in the day, it used to be that our predecessors followed the typical path of going to school, working until retirement, then living off their pensions in their golden years. But this former par-for-the-course scenario no longer seems as plausible as it had in the past. 

The rising cost of inflation and longer life expectancy, and reduced social security and insurance packages have shrunk the value of expected retirement benefits. In fact, hanging up one's hat seems a less enticing and more daunting prospect today. One thing's for sure: we need to take retirement planning more seriously. What are your potential future income sources, and how can they be impacted differently by retirement taxes?

How will my retirement affect my taxes?

Taxes on Social Security Benefits

The larger your income, the higher the portion of your Social Security benefits will be subject to taxes. You will only need to pay taxes on up to 50% of your SS income if you're filing your federal tax return as an individual and you have a combined income (or other income) in the range of $25,000 to $34,000. If your total income exceeds $34,000, you could pay taxes for as much as 85% of your Social Security benefits. If you're married, you typically file a joint tax return, and you and your spouse have additional or combined income that falls within $32,000 and $44,000, expect to shell out taxes on up to 50% of your benefits. Beyond $44,000, up to 85% of your Social Security income may be subject to taxes. 

However, if you and your spouse file your tax returns separately, you may not receive any tax credits. Now, if you don't have any other income outside of your social security, this will shield you from paying any taxes on any of your retirement benefits. 

Taxes on social secuirty benefits? Social Security is exempt from state tax when you live abroad.

Taxes on IRAs and 401(k)s and other Qualified Accounts

IRAs are individual retirement accounts. By themselves, they aren't investment plans. Instead, they are used to hold assets such as stocks, mutual funds, and corporate bonds. On the other hand, 401(k)s are employer-sponsored tax-free retirement plans where your company automatically deducts your contributions and invest these in your chosen funds. Both retirement accounts are tax-deferred, allowing you to make making pre-tax contributions and decrease your taxable income. This means your money keeps growing tax-deferred while it's still within either plan. 

Note that if you cash these plans prematurely, you will have to pay a 10% early withdrawal penalty. Upon the mandatory retirement age of 59½, you can start making withdrawals without any penalty. The investments you made, and the subsequent gains, will be taxed at that point as ordinary income. When you hit age 72, you must make a required minimum distribution or RMD (withdrawal) from your retirement plans every year to avoid tax penalties. The government designed it this way to ensure that you will eventually pay your taxes. However, most people are in lower tax brackets at older ages.

Taxes on Annuity Income

An annuity is a standard insurance product that can be another investment strategy for retirees. Annuities will make regular payments to you either immediately or at some point in the future.

The insurance company collects a single premium from you, and it grows tax-deferred, based on an interest rate - sometimes the interest rate is based on market performance (indexed annuity), but your money is not actually in the market. Deferred variable annuities, however, are invested in the market and, as such, could face investment losses, whereas other annuities are sheltered from losses. 

Since annuities are tax-deferred, the earnings compound over time; because annuities are already tax-deferred, you would generally not have one inside a tax-qualified retirement account (IRA, 401(k), etc.). If the annuity is not inside a qualified account, you can invest as much money as you want for retirement. 

Annuities can create a guaranteed stream of income when you annuitize the account. Unless the annuity exists inside a qualified account, there would be no required minimum distributions (RMDs). If you make withdrawals before age 59½, you may be subject to a 10% IRS penalty.

When you start to receive income from the annuity (annuitize), you receive a set of payments as income, ensuring that you will never run out of money or not have income coming in.

Although annuities allow joint ownership and don't apply restrictions on the amount of contribution and distribution, they can cost more than IRAs at the outset because of higher fees and other administrative expenses. However, if you are a conservative investor, you don't have to worry about the risk of loss (unless it is a variable annuity that is actually invested in the market).

How your annuity distributions are taxed depends on how you paid for them. If you have a non-qualified annuity or one that's funded with post-tax dollars (meaning you already settled the necessary income taxes). You'll no longer owe any taxes on the contributions you made. However, taxes will be due on the gains from the annuity.

If you paid with pre-tax dollars, you have a qualified annuity, which means taxes will be imposed on any distributions or income upon the maturity of the pension plan and not before. The pre-tax period allows you to keep more of your money in the insurance product as your fund continues to grow tax-free.

It is usual for retirees to move to another state to be closer to family. However, they may also want to consider the different tax rules of each state as another substantial reason to change residences.

Inheritance and Estate Taxes

Inheritance and estate taxes are often interchanged, yet, they are markedly different. Currently, there are only six states with inheritance levies. You will need to pay inheritance taxes if your deceased benefactor lives in any of these states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If they don't, that's good news for you, especially because the federal government does not tax inheritance of any kind.

As for estate taxes (both state and federal), heirs aren't responsible for paying them. Instead, these are paid directly by the estate after the decease of the estate owner. Although tax rules vary from state to state, regardless of where you live, the government imposes a 40% federal estate tax on the portion of any property that goes beyond $12.6 million ( or $23.4 million for a married couple as of 2021). For 2022, the federal personal estate tax exemption amount is $12.06 million (it is $11.7 million for 2021). These taxes mean a large percentage of the wealth that you've worked so hard to build may not end up being enjoyed by your loved ones depending on the size of your estate.

If you're a high net-worth individual, you may want to protect your heirs by looking into tax-efficient charitable trusts, such as a charitable lead annuity trust or charitable remainder unitrust. The government encourages philanthropic donations through these trusts by giving donors substantial tax breaks on their contributions.

Tax Breaks

There are tax breaks that are available that can be helpful in retirement. If you have a Health Savings Account that money continues to grow tax-free forever, and the funds come out tax-free if they are used to pay for qualified medical expenses and some insurance premiums like Long-Term Care Insurance - IRS Reveals 2022 Long-Term Care Tax Deduction Amounts and HSA Contribution Limits | LTC News

The Bottom Line

Learning about the impact of taxes on your retirement income can help you project how much you need to live comfortably in your sunset years. This will motivate you to develop better tax-efficient savings and investment strategies to help secure your future and that of your loved ones. Find out more from your estate and financial planning advisors today.

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About the Author

Sophia Young became a writer be able to tell stories and paint the world through her words. She writes on a variety of topics that interest her and her readers. Contact her at -

LTC News Contributor Sophia Young

Sophia Young

Contributor since September 16th, 2021

Editor's Note

You can have your future retirement planned thoroughly, but you are not fully prepared unless you have considered the consequences of long-term health care.

The costs of long-term health care can dramatically impact your income and assets. Unless you are prepared, you would need to liquidate assets to pay for the expensive costs of in-home care, assisted living, memory care, and nursing homes. Not only are you using your own money the tax consequences of selling off accounts can make your costs even higher. Plus, consider the timing. You may be selling at a loss if the markets are down when you need the funds to pay for long-term care, yet that loss could still be a taxable gain.

Affordable Long-Term Care Insurance gives you guaranteed tax-free funds to pay for your choice of quality care services. You can safeguard your income and assets and reduce the considerable stress and anxiety otherwise placed on your family.

Benefits from Long-Term Care Insurance are always tax-free, and premiums can be tax-deductible in some cases.

Most people start obtaining coverage in their 50s.

Planning Tools and Resources on LTC NEWS

You can find many tools and resources on LTC NEWS to assist you in your research for a planning solution or help your family find the appropriate care for a loved one at the time of crisis. 

To help you plan the costs and burdens of changing health and aging, LTC NEWS has put in place several resources, including:

Find all the resources on LTC NEWS - Resources for Long-Term Care Planning | LTC News.

Seek Professional Guidance

Insurance rates are regulated, so no insurance agent, agency, or financial advisor can give you special deals. However, insurance companies' premiums vary over 100% for the same coverage.

Experts suggest using a qualified Long-Term Care Insurance specialist to help you navigate the many options available to you and your family.

A specialist who works with the top companies can match your age, health, family history, and other factors and find you the best coverage at the best value. A specialist will save you money, and you will have peace of mind knowing they are making the appropriate recommendations - Work With a Specialist | LTC News.

Finding Quality Care for Mom or Dad

Start by reading our four guides -  

If they are lucky enough to own a Long-Term Care Insurance policy, be sure they use it. Sometimes families wait, thinking they can save the benefits for a rainy day. Waiting on using available Long-Term Care Insurance benefits is not a wise idea. 

Get Help in Filing a Long-Term Care Insurance Claim

Quality care obtained early will help provide a better quality of life and reduce the risk of a deep decline and facility care. If you need help in starting the process of a Long-Term Care Insurance claim, LTC NEWS can help.

LTC NEWS provides free assistance with no obligation to help you or a loved one complete the claims process with a Long-Term Care Insurance policy. We have teamed up with Amada Senior Care, who will do all the work, free with no obligation. 

You can also get support in finding quality caregivers and get recommendations for a proper care plan, whether a person has a policy or not. - Filing a Long-Term Care Insurance Claim | LTC News

Benefits of Reverse Mortgages 

Today's reverse mortgages for those aged 62 and older could be an ideal resource to fund a Long-Term Care Insurance policy OR even provide money to pay for care if you, or a loved one, already needs help and assistance.  

Some people have much of their savings invested in their homes. With today's reverse mortgages, you can find ways to fund care solutions, care itself, even help with cash flow during your retirement. 

Learn more by asking questions to an expert. LTC NEWS columnist and host of the TV Show "62 Who Knew" will answer your questions regarding caregiving, aging, health, retirement planning, long-term care, and reverse mortgages. 

- Just "Ask Mike." - Reverse Mortgages | LTC News.

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Be sure to write for our core target audience of adults aged 40 and older. Our audience is worldwide; however, our primary target is the United States, Canada, the United Kingdom, and other English-speaking nations. 

Improve your website or blog's SEO and gain exposure and traffic at the same time by being a contributor to LTC NEWS. 

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Email your story idea or article: - LTC News Contributors | LTC News

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Learn more about how LTC NEWS can help you market your business, drive traffic, and improve SEO - Advertise With Us | LTC News.

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