4 tax surprises you could face in retirement – Motley's Fool

Many working adults are accustomed to losing part of their income in favor of taxes. New retirees, on the other hand, are often shocked to see that much of their income is, in fact, also subject to tax. Here are some unpleasant tax surprises that might surprise you in retirement if you are not careful.

1. Taxes on social security benefits

If most of your retirement income comes from social security, you may not be able to pay taxes on these benefits. But if you have additional sources of income, and substantial sources, there is a good chance you will lose some of your benefits through federal taxes.

To determine if this will be the case, you will have to determine what you call your provisional income, which roughly corresponds to your income outside Social Security and half of your annual benefits. If your total lands between $ 25,000 and $ 34,000 as a single filer, or between $ 32,000 and $ 44,000 by filing taxes together, you could be taxed on up to 50% of your Social Security income. . And if your provisional income is greater than $ 34,000 as a single filer or $ 44,000 as a common filer, you could be taxed on up to 85% of these benefits.

Even if you manage to avoid federal taxes on your social security income, your benefits could be taxed at the state level if you live in any of the following 13 states: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska , New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. The good news, however, is that most of these states offer some form of relief to middle- to moderate-income workers, which means that if your income is not too high, you could also avoid the taxes of State on your benefits.

2. Taxes on withdrawals from pension plans

Unless you house your savings in a Roth IRA or in 401 (k), you can expect a tax on withdrawals from your retirement plan, and the extent to which the IRS uses your money will depend on your slice of taxation of retirement. If you expect to be in a higher tax bracket at retirement than during your working years, it is advantageous to consider saving in a Roth account. And if your income is too high for you to contribute directly to a Roth, you can instead finance a traditional account and convert it into a Roth afterwards.

3. Taxes on pension income

Although pensions are not as common as they used to be, people who are lucky enough to retire are taxed, as are people with traditional retirement savings plans. That said, you could avoid pension income taxes if it arises from a military pension or a disability pension.

4. Taxes on investment gains

Holding investments outside of a retirement plan like an IRA or 401 (k) is a good way to gain more flexibility with these assets. The disadvantage, however, is that if you make money on these investments in retirement, you will be subject to taxes every year, you will realize a gain, just as you would for the gains on investments made during your working years.

Fortunately, you can reduce your tax burden by holding investments for at least a year and a day before selling them for profit. In doing so, you move from the short-term capital gains category to the long-term gains category, thereby reducing the amount of tax you have to pay on those gains.

The more you learn about taxes in retirement, the less you'll be surprised when you get older. According to the Nationwide Retirement Institute, nearly 70% of recent retirees admit that they have entered their golden years without key knowledge about tax planning. If you prefer not to join their ranks, take the time to read about the tax obligations in retirement today or ask a tax advisor or financial advisor who can guide you in this regard.