How taxes can impact your retirement savings and Social Security income
Understanding how taxes impact your retirement savings and Social Security income is a crucial step in planning for your retirement.
We’ll review some valuable information that can help you maximize your retirement savings and spending.
Taxes on retirement plan withdrawals
Taxes on the money you contribute to a traditional 401(k), 403 (b) are deferred, offering the benefit of reducing your taxable income during your working years. That means, when you start withdrawing from your retirement accounts, the IRS treats your withdrawals as ordinary income. So, the amount you take out is added to your total income for the year and taxed according to your current tax bracket.
If you withdraw large amounts in one year, it could bump you into a higher tax bracket, increasing the taxes you owe. It’s important to carefully plan around your withdrawals to avoid paying more than necessary in taxes. Start by looking at your required minimum distributions to get an idea for how your retirement income may be taxed.
Taxation on IRA withdrawals
If you have Individual Retirement Accounts (IRAs), and the tax treatment of withdrawals depends on whether you have a traditional IRA or a Roth IRA.
With a traditional IRA, much like the 401(k), contributions may have been tax-deductible, and the funds grow tax deferred. Once you begin withdrawals, they are taxed as ordinary income. You’ll need to consider the same tax implications as with a 401(k)—taking out larger sums could push you into a higher tax bracket.
However, if you have a Roth IRA, withdrawals are entirely different. Roth IRAs are funded with post-tax dollars, meaning you’ve already paid taxes on the money before contributing it. Because of this, qualified withdrawals (after age 59½ and having had the account for at least five years) are tax-free.
This is a significant advantage in retirement since you won’t owe any taxes on the income you take from your Roth IRA. For many retirees, having both types of accounts allows for more tax-efficient withdrawal strategies.
It's important to carefully plan around your withdrawals to avoid paying more than necessary in taxes.
So, Roth or traditional? Great question.
IRAs are retirement savings accounts with tax advantages. They can be another way to keep your retirement goals on track. All it takes to find your ideal fit is a basic understanding of their key differences and benefits.
| Roth IRA | Traditional IRA | |
| Am I eligible? | If you make under a certain amount per year. | If you’re under 70 and you, or your spouse, is earning an income. |
| Taxes on contributions | You contribute after taxes cand can’t deduct. | You may be able to deduct contributions from your taxes. |
| Taxes on withdrawals | No | Withdrawals are taxes as income. |
| What if I need the money before retirement? | You can access your contributions at any time without penalty. Earning may be subject to taxes and fees. | You can access your money which is taxes as income, plus a 10% penalty though there are exceptions to the penalty. |
| Are there required minimum distributions (RMDs) | No | Yes, at 72 years old. |
| Can it include lifetime income? | No | Yes |
| Learn more about |
Working part-time and Social Security taxes
If you’re receiving Social Security benefits and are under
Once you reach full retirement age, the SSA stops withholding any portion of your benefits, no matter how much you earn. However, part-time earnings could still affect how much of your Social Security income is taxable. If your total income—including wages, Social Security, and other retirement account withdrawals—exceeds certain thresholds, up to 85% of your Social Security benefits could become taxable.
If you’re single and your combined income (adjusted gross income plus half of your Social Security benefits) exceeds $25,000, up to 50% of your benefits may be taxable. If your income exceeds $34,000, up to 85% may be taxable.
Married couples face higher thresholds—$32,000 and $44,000 respectively—but the impact on Social Security benefits can be significant, especially if you’re working part-time and taking other retirement income.
Required minimum distributions (RMDs)
You’ve heard of them, but what exactly are they?
RMDs are the minimum amounts the IRS requires that you withdraw each year to ensure that tax-deferred funds are eventually taxed. These withdrawals are taxed as ordinary income. For retirees who have substantial retirement account balances, RMDs can push you into higher tax brackets, particularly if you’re also receiving Social Security or other sources of income.
Failing to take the correct amount as an RMD can result in hefty penalties—50% of the amount not withdrawn. So, it’s crucial to make sure you’re withdrawing at least the required amount each year.
One way to manage the tax impact of RMDs is to start withdrawing earlier (even before RMDs are required) and spreading the distributions over time, possibly when you’re in a lower tax bracket. Additionally, consider Roth conversions before reaching RMD age. By converting some traditional IRA or 401(k) funds into a Roth IRA, you’ll pay taxes upfront, but future withdrawals from the Roth will be tax-free, and Roth IRAs are not subject to RMDs.
Once you turn 73 (or 72 if you were born before 1951), you’ll be required to take Required minimum distributions (RMDs) from your traditional 401(k) and IRA accounts. Want to
State taxes and retirement
While Federal taxes often get the most attention, state taxes can also significantly affect your retirement income. Not all states tax retirement income equally or at all. Be sure to check your state’s tax rules and consider them when planning where to live in retirement.
Some states tax 401(k) and IRA withdrawals but exclude Social Security income from taxation. Others may offer retirement income exemptions or tax deductions that can reduce your overall tax burden. Understanding these differences can help you choose a more tax-friendly location for your retirement.
Planning for taxes in retirement
Consider consulting a financial advisor or tax professional to help you create a tax-efficient strategy tailored to your situation. With the right plan in place, you’ll be better positioned to enjoy your retirement years without being surprised by unexpected tax bills.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
Retirement check refers to the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA's fixed annuities.
Investment decisions should be made based on the investor's own objectives and circumstances. Advice is obtained using an advice methodology from an independent third-party.
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