How Does the IRS Tax Retirement Benefits?

If you are nearing retirement, it is a good idea to understand how does the IRS tax retirement benefits.  That way, you can plan ahead, set aside, and choose the right plans for keeping your income tax bill to a minimum. 

Taxing Your Retirement Benefits

If you are retiring, you are likely to have income from a number of sources, such as:

  • Income from annuities
  • Income from IRA’s and other retirement plans
  • Distribution from a pension plan
  • Social Security income

Each of these income sources is taxed differently, so you’ll want to do your homework! 

Social Security Income Taxation

Depending on your overall retirement income, including monies from pensions, etc., your Social Security benefits may even be partially or totally free of taxes.  Determining how much of your benefits are taxable is important, and will depend on some of the following areas of taxation. 

Income from Annuities and Pensions

Your pension may be subject to taxes, especially if the contributions you made to those pensions were tax-deferred.  You would need to consult with particular IRS publications, specifically those governing pension and annuity income, to determine the precise way in which this income will be taxed.  Furthermore, the administrator for your pension plan can assist you in calculating the portion of your pension that can be taxed, based on the overall amount of each pension payment. 

Distributions from 401(k) Plans and IRAs

Income from 401(k) plans is fully taxable because the contributions you made to these plans used tax-deductible income.  On the other hand, income or distribution from your IRAs (or individual retirement accounts) may be fully tax-free, partially taxed, or fully taxed, depending on the particular IRA you own.  For example, with traditional IRA’s, your income will be fully taxed because your contributions (and interest earned on those contributions) were tax deferred until they are taken out, when you retired.  Roth IRA’s, on the other hand, are tax free if:

  • Your first contribution was made five years or more before you began collecting any money from the IRA
  • You received the distributions from the Roth IRA after you reached the age of 59 and a half.

Getting Help

Again, if you have questions about how these or any aspects of your retirement income are taxed, consult the relevant IRS publications, speak to your plan advisors, or to a qualified attorney.  In addition to providing you with more information, a tax attorney can also help you minimize your tax burdens by advising you to take out only what you need, waiting to take out income, and taking other legal steps to preserve your assets.

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