Preparing for retirement takes a lifetime, whether you save money on your own, through Social Security or with a company retirement plan. Some pension or retirement plans require payment of taxes on the earnings before investment; others allow you to invest and pay taxes when you withdraw the money. The type of pension and your income at retirement determines your federal tax liability.
Social Security allows you to start withdrawing full benefits at age 66 or 67, depending on your year of birth. If Social Security is your only income, you pay no taxes on your pension. The Internal Revenue Service taxes Social Security retirement benefits if you have income in addition to Social Security that puts you over the exempt limit. It taxes 50 percent of your Social Security benefits if your modified adjusted gross income is between $25,000 and $34,000 as a single tax filer or between $32,000 and $44,000 as a married couple filing jointly. The IRS taxes 85 percent of your Social Security benefits if your modified adjusted gross income is greater than $34,000 as a single taxpayer or $44,000 as a married taxpayer filing jointly.
You make traditional individual retirement arrangement contributions before taxes, so you don’t pay taxes when you or your employer deposits the money to your pension account. If you rolled over any taxed income into your IRA, you may have both taxable and non-taxable funds. You must start withdrawing your traditional IRA funds at age 70 1/2, and as a general rule, you pay taxes on amounts you withdraw that you haven’t paid taxes on previously. If you are 70 1/2 or older, you must receive your required minimum distribution by the end of the calendar year or you might owe excise taxes in addition to income taxes on the distribution.
You contribute to a Roth IRA after you pay taxes on the earned income. If you meet all requirements, you can withdraw the Roth IRA funds when you reach retirement age without paying taxes on the allowed contribution amount or the earnings from the contribution. You must keep the contributions in the Roth IRA for five years and you must be 59 1/2 years old for distribution without penalty. IRS Form 8606 helps you determine any taxable amounts of a Roth IRA distribution.
State Income Taxes
States with no income tax at publication are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Other states don’t tax some retirement benefits. States often follow the federal income tax format to determine state income taxes. If you owe taxes on your Social Security on your federal income taxes and your state uses the adjusted gross income figure to determine state tax liability, you may owe state taxes on your Social Security benefits. According to Top Retirements, only 14 states tax some of your Social Security benefits. Many states don’t tax federal, state and local government pensions or military pensions, but five states tax all forms of pensions. Those five states are California, Connecticut, Nebraska, Rhode Island and Vermont.
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