Do You File a Tax Return on Retirement Income?

Curtis has earned the Life and Health Insurance licensure, has passed the Series 66 examination, and has earned a degree from the University of Nevada, Reno. He has over 20 years of experience in the financial industry, helping others protect, grow and manage their wealth. Curtis helps clients create customized strategies for their portfolios based on their unique financial goals.

 

DO YOU FILE A TAX RETURN ON RETIREMENT INCOME?

Do you file a tax return on retirement income? The quick and easy answer to this is yes, of course you do. 

You will most likely transition from receiving a form W2 from wages or earned income to a form 1099 for retirement income. Roth IRA or after-tax money is the only form of funds that you do not have to claim on your tax return, and since most of us have a mix of pre-tax monies, after tax monies, and non-qualified assets, most of us will be filing a tax return on retirement income. 

With that being said, let’s focus on some of the main areas of taxation in retirement and talk about some of those items you see on your tax return.

 

WHAT IS TAXED IN RETIREMENT?

Two main forms of income in retirement can be a pension or Social Security. 

1.       A pension will most likely always be taxable as income. However, certain things like Veteran Disability pay are tax free.

2.       Social Security becomes taxable once you reach a certain threshold of income in retirement. Any withdrawal from the following will be taxed as ordinary income:

  • Pre-Tax IRA

  • 401k

  • 403b

  • 457

Do you file a tax return on retirement income?
 

The equation of your Social Security being taxed is dependent upon the amount you have distributed from your pre-tax account(s). If you are married filing jointly, once your have a modified adjusted gross income (or MAGI) of $32,000, your Social Security will be up to 50% taxable. Once you cross the threshold of $44,000, your Social Security will be 85% taxable.  For a single filer, it will be up to 50% taxable at $25,000 of MAGI and up to 85% taxable at $34,000 MAGI.

If you are looking at how a Non-Qualified account will be taxed in retirement, the things that you will be focusing on will be the Dividends and Interest and the Capital Gains and Loss.  Dividends and Interest will always be calculated on your tax return and in the current tax code. If you are in the 12% tax bracket or under, you may not be taxed on something like Capital Gains.  As stated above, the Roth IRA money that you withdrawal will be tax free and not claimed on the tax return.  There is a caveat to this however, if the Roth IRA is under 5 years old, your earnings will be taxable upon withdrawal not your principal or contributions.  This is also referred to as the 5-year rule.

REQUIRED MINIMUM DISTRIBUTIONS

One of the main areas of taxation in retirement is your Required Minimum Distribution from your pre-tax accounts, which is required now to start at age 73.  (This used to be age 70.5 and then age 72 respectively). The RMD age will increase to 75 for anyone born in 1960 or later.  The RMD is calculated by the IRS so this is something that you won’t have complete control over when it comes to the amount.  The amount is calculated by the Uniform Lifetime Table which is a divisor that comes out of your pre-tax account balance as of December 31st of the previous year.

While it would be nice to get a break from filing a tax return in retirement, the odds are that you will not have that luxury.  There are many factors that go into taxation in retirement, so it is extremely important that you have a plan in place to address things like Roth Conversions, withdrawal strategies, and investment strategies.

Working with a financial professional to create these strategies can be vital in retirement.  Although you have to file a tax return in retirement, you can try to make it as painless as possible with proper planning.

Our advisors use a comprehensive approach to curate a personalized plan for each of our clients. We want to help you live the retirement you’ve dreamed of through our fiduciary-based financial planning. Call us today at (775)-853-9033 if you’d like to see how Cornerstone could help you.

Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.

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