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As much as 85% of your social security income can become taxable.
Is this actually a myth?
Truth to tell, I haven’t had anyone who is actually retired tell me this. They know the truth, which is that this myth is patently false. I have, however, had many younger people share their belief that social security and other retirement incomes aren’t taxable, a painful lesson to learn by being wrong.
How much of retirement income is taxed?
As much as 85% of your social security income can become taxable. The math of how to determine the specific amount is complicated, but essentially if you have other income streams you will likely see some portion of your social security income taxed.
The added sting comes from these earnings beings taxed a second time. Your social security contributions throughout your life came from after-tax funds either held from paychecks or paid in the form of self-employment tax. This means I paid taxes on the money paid into social security at the time I paid in, and then get stuck paying taxes on the money a second time when I receive the benefits.
Wow! That's kind of redundant. What about 401K/IRA contributions?
Most pension income will be taxed and unless your 401K/IRA contributions were all ROTH contributions, then there will be some taxes due on your distributions.
So, tax planning is important?
Tax planning for retirees with multiple income streams can be very complicated. When each person should start drawing their social security depends on a variety of factors as well as the personal philosophies of the taxpayers. There most certainly will be income taxes paid in most situations.
We always recommend working closely with your financial and tax advisor to setup the most favorable outcomes for your finances leading up to and during your retirement years. This is best accomplished with in-person planning, but if you prefer to research for yourself the following link may be helpful:
https://www.thebalance.com/tax-planning-strategies-for-retirees-3193492
