Understanding Different Types of Retirement Income

Here’s how common sources of retirement income are taxed:

• Social Security Benefits: Depending on your total income, up to 85% of your Social Security benefits may be taxable. Understanding how to manage other income sources can help reduce this tax impact.

• Traditional IRAs and 401(k)s: Withdrawals from these accounts are taxed as ordinary income. It’s essential to plan your withdrawals carefully to manage your tax bracket in retirement.

• Roth IRAs: Qualified withdrawals from Roth IRAs are tax-free, making them a valuable tool for tax planning.

• Pensions and Annuities: Pensions are generally taxable, and the tax treatment of annuities depends on how they were funded—either with pre-tax or after-tax dollars.

Here are some strategies to consider as you plan for retirement:

1. Diversify Your Retirement Accounts: A mix of taxable, tax-deferred, and tax-free accounts can give you more flexibility in managing your tax liability in retirement. For example, you can draw from Roth accounts (tax-free) when your income is higher and from traditional accounts (tax-deferred) in years when your income is lower.

2. Consider Roth Conversions: Converting a portion of your traditional IRA or 401(k) to a Roth account can result in tax-free income later. Although you’ll pay taxes on the converted amount now, it can be a smart move if you expect to be in a higher tax bracket in retirement.

3. Plan Your Withdrawals Carefully: You can minimize your tax burden by carefully planning when and how much you withdraw from your retirement accounts. For instance, you might delay withdrawals from tax-deferred accounts until you start receiving Social Security benefits, when your taxable income may be lower.

4. Take Advantage of Tax Credits and Deductions: Even in retirement, you may qualify for tax credits and deductions that can reduce your tax liability. For example, the Senior Tax Credit is available to retirees with specific income requirements.

5. Consider State Taxes: Some states tax retirement income, while others do not. If you’re considering relocating, factor in state taxes as part of your decision.

Retirement should be a time to enjoy life, not worry about taxes. You can secure a comfortable and financially stable future with smart tax planning. Don’t let taxes erode your retirement income—reach out to us today at 215-454-6483 or visit cwfphilly.org to learn more about how Campaign for Working Families can help you secure your financial future.

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