Retirement Income, Taxable?
Published on January 07, 2025
by Ma. Franchisca Conde
Franchisca, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.
Table of Contents
Is retirement income taxable?
Yes, retirement income is taxable in many cases, depending on the type of income and your total earnings.
Common sources of retirement income like Social Security benefits, pensions, IRA distributions, and 401(k) withdrawals are subject to federal income taxes, and in some cases, state taxes.
However, how much you owe depends on factors like your total income, filing status, and the tax treatment of your retirement accounts.
How does income impact Medicare Premiums in retirement?
Your income in retirement can affect how much you pay for Medicare premiums, specifically for Parts B (Medical Insurance) and D (Drug Coverage). If your modified adjusted gross income (MAGI) exceeds certain thresholds, you may have to pay an Income-Related Monthly Adjustment Amount (IRMAA), which is an additional charge on top of the standard premium.
For 2024, IRMAA starts applying if your MAGI is over US$97,000 for single filers or US$194,000 for married couples filing jointly.
How can I manage taxes in retirement?
Managing taxes in retirement means figuring out the best way to withdraw money from your accounts to keep your tax bill as low as possible.
Different types of retirement income are taxed in different ways. For example, money you take out of traditional IRAs and 401(k)s is fully taxed, while withdrawals from Roth IRAs are tax-free if you follow the rules.
Here are some tips to manage your taxes:
- Spread Out Withdrawals: Try not to take out too much money in one year. This can help you stay in a lower tax bracket.
- Plan Social Security Benefits: If you delay starting Social Security, it can reduce your taxable income now and give you bigger monthly checks later.
- Be Smart About Investments: Some investments are better in taxable accounts, while others work better in retirement accounts.
If you’re unsure, a tax expert can help you figure out the best strategy for your specific situation.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
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Are state taxes different for retirement income?
Yes, state taxes on retirement income can vary a lot depending on where you live. Some states, like Florida, Texas, and Nevada, don’t have state income taxes at all, which means your retirement income isn’t taxed at the state level.
Other states may tax your pension, Social Security, or withdrawals from retirement accounts, but some offer exemptions or discounts for retirees.
What should I know about tax withholding and estimated payments?
In retirement, you still need to pay taxes, but the way you handle them might be different. Some of your income, like Social Security, pensions, or withdrawals from retirement accounts, can have taxes automatically taken out.
This is called tax withholding, and it helps you avoid having a big tax bill at the end of the year.
If you’re earning money that isn’t automatically taxed—like income from investments or freelance work—you might need to send estimated tax payments to the IRS every three months.
These payments cover what you owe so you don’t get hit with penalties.
To make sure you’re paying the right amount, you can adjust tax withholding by filling out IRS Form W-4P for pensions or Form W-4V for Social Security.
Are social security benefits taxable?
Yes, Social Security benefits might be taxable, but it depends on how much income you have from other sources. The IRS looks at something called “provisional income,” which is the total of:
- Half of your Social Security benefits
- Other income like retirement account withdrawals, pensions, or investments
Here’s how it works:
- If your total income is less than US$25,000 for singles or US$32,000 for couples, your benefits won’t be taxed.
- If it’s US$25,000–$34,000 for singles or US$32,000–$44,000 for couples, up to 50% of your benefits can be taxed.
- If it’s over US$34,000 for singles or US$44,000 for couples, up to 85% of your benefits could be taxed.
How are IRAs and 401(k)s taxed in retirement?
When you take money out of an IRA or 401(k) in retirement, you’ll usually have to pay taxes, but the rules depend on the type of account you have:
- Traditional IRAs and 401(k)s: Withdrawals are taxed as regular income, just like a paycheck. For example, if you take out US$10,000, it’s added to your taxable income for the year. If you’re under 59½, there’s an extra 10% penalty unless you meet certain exceptions, like using the funds for qualifying medical expenses or education.
- Roth IRAs and Roth 401(k)s: Withdrawals are typically tax-free as long as you’re at least 59½ and have had the account for at least five years. That’s because you already paid taxes on the money you put in.
What taxes apply to pension and annuity income?
Most of the income you get from pensions or annuities is taxable. If your employer paid into the plan, the entire amount you receive will be taxed as regular income.
If you put in your own after-tax money, part of your payments might not be taxed. The IRS has a formula to figure out how much of your payments are taxable versus tax-free.
Some states also tax pension and annuity income, so you might owe additional taxes depending on where you live.
To make things easier, you can set up tax withholding from your pension or annuity payments, similar to when taxes are taken out of your paycheck. This can help you avoid having to make extra payments or deal with penalties later.
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