Transitioning from the workforce to retirement presents a unique set of challenges. This guide is designed to educate investors on various forms of retirement income & how they are taxed.

How Taxes Work:

Before we discuss various types of retirement income, its important to understand the basics on how the American tax system works. Here are some details that tax-payers should understand:

The US has a progressive tax system, meaning as your income increases, your tax rate increases as well.

Tax rates are marginal, which means all of your income is not taxed at your highest rate.  

Marginal Tax Rate = The highest rate at which you are taxed.  

Effective Tax Rate = Your average tax rate.

Let's Look at an Example:

A couple earns $300k in total taxable income, married filing jointly. Here's the rates at which their dollars would be taxed:

The couple would owe approximately $58k in federal taxes, making their effective tax rate 19.3% ($58k / $300k). Keep in mind this does not account for State taxes...

Capital Gains Taxes

If you sell stocks at a profit, you could be subjected to capital gains taxes (short term or long term).

Note: Capital gains only apply to taxable accounts/assets, NOT for tax-deferred accounts like 401(k)’s & IRA’s.

Short-Term Capital Gains:

Selling an investment that was held for less than 1 year, the profit is taxable as ordinary income.

• For example, the couple above ($300k income) buys a stock for $20k.
• Six months later, the stock has gone up, and they sell it for $30k.
• The $10k profit is taxed at their marginal rate, which is 24%, which = $2,400 in taxes.

Long-Term Capital Gains:

Selling an investment that was held for more than 1 year, the profit is taxable between 0% - 20%, based upon your income.

• Using the same example, the couple above buys a stock for $20k.‍
• This time, they hold for longer than 1 year before selling it for $30k.
• Their tax owed on the $10k profit is based upon the chart below:

Based upon the couple's income of $300k, the $10k profit is taxed at 15%, which = $1,500 in taxes.

Common Sources of Retirement Income:

Did you know....Most of the common sources of retirement income are taxable. This includes Social Security, 401k withdrawals, & pensions.

Here are some common places that retirees look for income:

Tax-Friendly Income Options

Understanding the taxation of Roth & Brokerage accounts can help better position retirees while they spend...

Where's my Roth??

If your Roth balance is low or nonexistent, here’s likely why:

• Earners are incentivized to contribute to tax-deferred 401(k)’s in order to reduce their taxes, especially in high-income years.
• Roth’s also have restrictions: In 2024, a single filer’s Modified Adjusted Gross Income (MAGI) must be under $161k in order to contribute; married filing jointly MAGI under $228k.

Here's a quick breakdown of the key differences between Traditional IRA's & Roth's:

Liquidation Strategy

Determining when to liquidate accounts in retirement is dependent on many factors, like taxes & estate considerations. Personal needs aside, the chart below is generally accepted as an efficient order of liquidity:

Every retirement is different, and understanding what role taxes will play during distribution is critical. Working with an advisor to strategize a tax-efficient liquidity plan based on your situation can have a profound impact on your money.

‍_{Important Disclaimer: The information provided in this guide is for educational purposes only. Nothing here within should be considered investment or tax advice. Please consult with a financial advisor and/or CPA when considering investment and tax decisions.}