Tax Planning and RetirementPreparing for Retirement

There is so much you must prepare for as you near retirement. You need to make sure you have enough saved in various retirement accounts, figure out the best time for you to file for social security, decide where you want to live, learn about Medicare and your different health insurance options. With all this other planning going on many overlook a very pivotal part of their retirement planning: tax planning.

Social Security Income

For most retirees, their social security benefit is going to make up the majority of their retirement income. Social security benefits are taxable as regular income, but no more than 85% of your benefit is taxable. How much of your benefit is taxable is dependent on your filing status and your combined income. Combined income is defined by as the total of your adjusted gross income, your nontaxable income, and ½ of your social security benefits.

The taxable percentage of your benefit can be determined as follows:

  • Filing as Single
    • If your combined income is between $25,000 and $34,000 you may have to pay taxes on up to 50% of your benefits
    • A combined income that is over $34,000 means that up to 85% of your benefit may be taxable
  • Married Filing Jointly
    • A combined income between $32,000 and $44,000 means you may have to pay taxes on up to 50% of your benefits.
    • If your combined income is more than $44,000 up to 85% of your benefit may be taxable

A CFP® can help you calculate what your social security income will be and help you plan your taxes accordingly.


Investment Income

The second largest source of your retirement income will most likely be from your various investment accounts. It is best practice to utilize several different kinds of investment accounts and their different forms of taxation. Here is a list of common types of investments and their related tax considerations:

  • Traditional IRA and 401(k): Traditional IRAs and 401(k)s are funded with pretax money. They provide tax benefits during your working years since you can deduct your yearly contributions from your tax return. However, all withdraws taken from these accounts during retirement are fully taxable. You can put off taking money from these accounts, but once you reach the age 70 ½ you will have to take annual Required Minimum Distributions. Due to higher levels of taxation on Traditional IRAs and 401(k)s you may find it is best to leave taking money from these tax-deferred accounts until later in your retirement when you are in a lower tax bracket.
  • Roth IRAs: You create a Roth IRAs with money you have already paid taxes on. Because of this, distributions from these accounts are tax-free. But you must have had your account for at least 5 years and be over the age of 59 ½. Having some of these accounts will help you to receive tax-free income during your retirement.
  • Bonds: Typically, any interest earned on a bond will be taxed as regular income. However, municipal bonds are completely tax exempt at the federal level.
  • Stocks: If you receive qualified dividends or long-term capital gains from your stocks they will be taxed at a lower rate than non-qualified dividends of short-term capital gains. Typically, qualified dividends and long-term capital gains will pay a tax of 0%, 15%, or 20%, depending on your income. It is ideal to try and keep your retirement income low so that you qualify for 0% taxation.
  • Annuities: Annuities are low-risk investments that have guaranteed rewards. Their taxation depends on what type of money it was initially funded with (before-tax or after-tax).


Believe it or not, successful retirement tax planning and your future expenses go hand in hand. This is the case because the greater your expenses are, the more you will have to withdraw from your retirement accounts. The more you withdraw, the more money you will have to pay taxes on and the more likely you are to raise yourself into a higher tax bracket. If you plan on filing as married filing jointly in 2016, it is advantageous to keep your income under $75,300. This move will keep you in the 15% tax bracket.

One of the best things you can do to minimize your expenses is to pay off your mortgage before retirement. Your mortgage payment is usually your largest monthly bill. By keeping your mortgage into your retirement, you risk having to withdraw large sums from your retirement accounts, thereby increasing your tax liability. By eliminating your mortgage payment, you will give yourself increased income flexibility.


During your retirement, you will most likely have income from several different sources. These could include social security benefits, pensions, rentals, traditional IRAs, Roth IRAs, 401(k)s, saving accounts, stocks, bonds, annuities, etc. A successful retirement plan will include tax planning that will account for the different tax implications of each source of income. Meet with a Certified Financial Planner® who will help you remain on the path to a successful retirement through proper tax planning.