Retirement Income – Know How the Different Heads are Taxed

Friday, December 11, 2015, 6:00 AM | Leave Comment

Working in old age can be a very difficult proposition and one needs to save enough money that can allow him/her to live life peacefully.

Retirement planning is one of the most significant tools, using which one can improve their savings for the future and stay protected from various contingencies.

However, one of the significant things that people don’t really pay attention towards is the taxation on retirement income.

It wouldn’t be wrong to say that the biggest mistake that retired individuals make while calculating their expenses is overlooking the taxes, which they would need to pay to the state and the central government.

Therefore, it is really crucial for a retiree to know how exactly the different heads under the retirement income are taxed by the government.

As per conventional wisdom, one needs to tap the taxable accounts up front, followed by the Roth and the tax-deferred retirement accounts.

This is a simple strategy that makes sense for almost all kinds of retired individuals.

In case their accounts grow too big, several mandatory withdrawals could push them to a much bigger tax bracket.

For avoiding this situation, one needs to take all the withdrawals from the precise tax-deferred accounts held previously.

Have a look at how the different heads under the retirement income are taxed by the government.

  • Tax-deferred Accounts

    Tax deferred accounts can certainly make one feel the pain. All the withdrawals from the traditional IRAs and the 401(k) will surely be taxed as a basic income, which simply implies that it will be taken to the topmost tax bracket.

  • Taxable accounts

    The income from the sale of stocks, mutual funds, real estate, and bonds are taxed basically at capital gains rates, which differ depending upon how long the person has owned the money making investments.

    The long term capital gains rates that apply on the assets that an individual has held for more than a year can be really favorable.

    Most of the taxpayers end up paying around 15% on their long term gains.

    Whereas, the short term gains are precisely taxed at an ordinary rate of taxation.

    The interest that accrues on CDs and dividends and savings accounts through the money paid by the money making mutual funds is taxed at an ordinary rate too.

  • Roth IRAs

    One needs to include Roth IRAs in his/her retirement portfolio for better savings.

    People who’ve opened Roth for a period of more than 5 years and are at least 59 ½ years old can make withdrawals for absolutely no cost.

    One doesn’t even need to take the RMDs from the Roth when they turn 70 ½.

  • Social Security

    Several retired individuals are a bit dismayed and surprised to discover the fact that a small portion of their benefits under the head of Social Security are taxable.

    The taxes here depend entirely on the provisional income of the individual, which is nothing but the adjusted gross income in addition to all kinds of tax-free interest.

  • Pensions

    All the payments from government and private pensions are normally taxable at the ordinary or the basic income rate, assuming that the retiree didn’t make any no-after tax contributions towards the income plan.

  • Annuities

    In case the retiree did purchase an annuity, which basically offers some income in retirement, a small portion of the sum that represents the principal is absolutely tax-free.

    Different rules are applied here for measuring the amount of taxes to be paid on annuities, which need to be studied separately by a retiree.

These were some of the retirement income heads and the subsequent considerations under which they are taxed.

Every retiree must know about these taxation methods so as to avoid any kind of inconvenience.

About the author

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ.

He has over three decades of experience working with investments & retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments.

Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as MoneyForLunch, Biggerpocket, WealthManagement, SocialMediaToday and NuWireInvestor.

If you need help and guidance with traditional or alternative investments, email him at or visit

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