Retirees are often surprised by the continuing taxes they pay after they retire. Most people believe that their taxes will decline in retirement but that may not necessarily be true. While people are aware that Social Security taxes are withheld from their paychecks when they are in the workforce, some don’t realize that the benefit checks they will receive can also be taxed. Up to 85% of Social Security benefits are taxable. The income thresholds that trigger Social Security income taxes are low, $32,000 for a married couple, for example.
In addition, money taken from most qualified retirement plans including IRAs and 401(k) plans is eligible for taxation. Roth IRAs are an exception, although “unqualified” withdrawals may be taxed.
At age 70 1/2, retirees have to begin taking withdrawals called minimum required distributions (RMDs) from many of these plans. If you have a large plan this could put you into a higher tax bracket. It’s always a good idea to consult with a financial planner and a tax expert to prevent unpleasant tax surprises and to minimize the taxes that are owed during retirement.