Retirement and Taxes

March 30th, 2016

Taxes are part of life, and they don’t go away once you’re retired. They become much more important when you’re on a fixed income. We’ll help lay out the types of taxes you’ll pay in retirement, and how the tax situation differs from the tax situation of working adults.

Retirement Savings Accounts

When beginning to save for retirement, the majority of workers invest in a company sponsored plan from their employer, an individual plan, or both. Whether you choose an employer provided plan like a 401k, or an Individual Retirement Account (IRA), you choose between a traditional plan and a Roth plan.

With a traditional plan, you contribute money tax-free or tax-deferred. But when you retire and take the money out, you’ll pay taxes. With a Roth plan, you’ll pay taxes before you put the money in savings, but won’t have to pay taxes when you withdraw the money at retirement. It’s important to account for paying taxes at retirement, if you choose a traditional plan.

The most common source of retirement income is Social Security. This is federally mandated, and as long as you’re employed, you’ll be contributing to the program and paying taxes. Once you reach retirement age, you’ll be able to withdraw the funds you’ve saved. However, it is difficult to live on Social Security alone; it is meant to supplement a pension or retirement plan.

Filing Taxes