In last week’s post, I covered a few things you should consider in setting up withdrawals from your portfolio in retirement. One of the considerations was planning for taxes, and more specifically, how you can impact your tax liability from year-to-year by choosing the account from which you make your withdrawal. In this post, I’ll outline tax considerations in retirement in more detail.


For most of us, taxes will be lower in retirement than they are during our working years. Our salary goes away, leaving just a couple of common sources of income as follows:

  • Social Security
  • Pensions, though fewer and fewer of us have pensions
  • Portfolio withdrawals

Retirees get a tax break on Social Security, and depending upon income, anywhere from 0% to 85% of your Social Security earnings are taxed. The specific metric the IRS considers is something known as Modified Adjusted Gross Income or MAGI, and MAGI is just your Adjusted Gross Income plus tax-exempt interest and half of your Social Security Earnings. The Social Security Administration provides specific on taxation here.

Some retirees – most commonly teachers and Federal Government employees – still receive pensions. Pensions are, in general, subject to Federal taxation as if they were income. However, at a state level, many states exempt retirement income – which typically includes pensions and Social Security – up to a certain level. If you have a pension and are a Georgia resident, you can exempt up to $65,000 in retirement income starting at age 65. This would likely translate into a sharp drop in state taxes once you retire.

Aside from retirement income, the other big driver in planning for taxes in retirement is your investments. Where – that is, in what type of account – you hold your investments determines how those investments are taxed. For some accounts, income in the form of interest and dividends along with capital gains are taxed. In other types of accounts, some percentage – up to 100% – of the amount of what you withdraw is taxed as income. Here is a rundown, from most tax efficient to least tax efficient, of the most common types of accounts and how they are taxed:

Roths – Roths are a great vehicle from a tax perspective because they are not taxed.

Taxable Accounts (Individual, Joint, Trusts) – income in the form of interest and dividends are taxed, as are realized gains. Focusing on tax efficient investments in these accounts, being strategic about when gains are realized, and harvesting losses can help minimize tax on these accounts when planning for taxes over the course of retirement.

After-Tax Annuities – some portion of withdrawals are taxed as income. The actual proportion depends upon how you choose to take the withdrawal as well as what percentage of the value of the annuity is attributable to your original investment. Thus, anywhere from 0% of your withdrawal to 100% of your withdrawal can be classified as taxable income.

Tax-Deferred Accounts – there are many accounts that fall into this category, including 401ks, 403bs, SEPs, Simple IRAs, retirement annuities and Profit Sharing Plans. What these accounts all have in common, when planning for taxes, is that the contributions you made these accounts were not taxed – the account was funded with pre-tax dollars. Thus, in most situations, when you make a withdrawal from these accounts, the IRS will tax 100% of the withdrawal as income. Furthermore, these accounts are subject to required minimum distribution rules that force you to begin withdrawing from the accounts once you reach a certain age.

The good news when it comes to paying taxes in retirement is that you do have some control over what you will pay. Within certain limits, you can choose when you start to draw Social Security and pension income. You also have a good deal of control what investment accounts you decide to withdraw from, when you take withdrawals and what types of investments you choose for your various accounts. Understanding these options can help minimize tax over the course of retirement, and it can also help ensure you know how much you’re likely to plan and to plan accordingly.