Do You Pay Income Taxes in Retirement?


As you get closer to retirement, one question that may cross your mind is whether you still have to pay income taxes? This is a key question for retirees since typically they no longer earn a steady income. However, taxes are almost inevitable. So, with the proper planning, you can lower or potentially eliminate your income tax burden during retirement.

Taxes are certain

While retirement ends steady earnings and the daily commute to the office and never-ending Zoom meetings, one thing that remains unchanged is income taxes.

Therefore, to plan properly, it’s important to understand what taxes you must pay when you are retired and what portion of your income is taxable. The following are some basics considerations:

  • Some withdrawals from an annuity are taxable. An annuity is tax-deferred, which means you don’t pay income taxes until you begin withdrawing money. The IRS taxes withdrawals depending on whether you have a qualified or non-qualified annuity. Withdrawals from a qualified annuity are taxable. When you make a withdrawal from a non-qualified annuity only the earnings are taxable.
  • Funds from a tax-deferred investment are taxable. 401(k)’s and IRA’s are tax-deferred investments. Contributions to a tax-deferred account are not-taxed while the opposite is true when it’s time to withdraw your money. When you start withdrawing from a traditional IRA, the taxable amount is based on earnings. Any money you from your 401(k) is taxable.
  • Social Security benefits can be taxable. Retirees do not have a steady paycheck coming in, which means there are no federal tax, Social Security, or Medicare to pay. However, believe it or not, your Social Security benefits can be taxed. The taxable amount depends on any other retirement income you receive. According to the Social Security Administration (SSA), the IRS can tax up to 85% of your Social Security benefits.

How to lower your tax bill in retirement

Taxes in retirement could make up a large portion of your expenses, which is one reason to make sure you plan well. Although the part of your income that’s taxable varies, there are several tools you should be aware of that can help decrease or eliminate your taxes in retirement.

As you begin your financial planning, consider some of the following strategies:

  • Contribute to a Roth IRA. Think about opening a Roth IRA or, convert a traditional IRA to a Roth IRA. With a Roth IRA, you are not taxed on earnings or distributions in retirement. You must follow certain rules, for example, you must keep the account open for a minimum of five years.
  • Set up a health savings account. Contributions to a health savings account (HSA) account are tax-deductible, and the earnings and withdrawals you make for qualified medical expenses are tax-free. Therefore, an HSA serves two important purposes in retirement: reducing or eliminating taxes and providing an extra income source to cover healthcare costs. For 2022, the maximum contribution individuals can make is $3,650. For families, the maximum is $7,300. Also, those aged 55 and older may qualify for an annual $1,000 catch-up contribution.
  • Take advantage of untaxable income sources. For example, the proceeds you gain from selling your primary home are not taxable. The non-taxable proceeds from a home sale vary depending on whether you are single or married. You can also give some of your assets to family members to lower or avoid estate taxes.

Plan your retirement properly

Whether you’ve already started planning for retirement or are just about to start, it’s never too early or too late to talk to a financial advisor. A financial advisor will help you create a retirement plan that’s best suited for you and can provide guidance by adjusting your current investments.

Whether you start early or late, you’ll find that discussing your financial situation with an experienced financial advisor is beneficial in planning for retirement properly. This is especially true with so many investment and retirement options, each with its own unique and often overwhelming tax rules. Contacting a qualified financial advisor will certainly help you figure out if you’re on the right track or if there are other better options available for you.

Learn more about how taxes can affect your retirement by attending one of our Retirement Planning 101 Classes.

Millions of people in the U.S. are unable to care for themselves and need long-term care services. These people need assistance in performing one or more self-care activities of daily living such as eating, bathing, dressing, and executing basic movements like walking, sitting, or standing. Services can be provided in the patient’s home, a residential care community, nursing home, assisted living facility, adult day service center, or at a hospice. Housework, money management, shopping, organizing medication, and helping with communication are some of the other long-term care services that are provided.

The need for long-term care services has grown as the life expectancy of the U.S. population increases. There is a 70% chance a person who is 65 years of age or older will need long-term care, and women are more likely to need this care because they live longer than men on average. It’s not just the elderly who are most likely to need long-term care services. People who have been in an accident or have a chronic illness or chronic condition due to poor eating habits, lack of exercise, or family history are more prone to need long-term care services. Also, people who live alone are likely to need long-term service if they don’t have family or a partner nearby to help take care of them.

Long-term care services can be expensive for most people, and the longer a person needs servicing, the more expensive it gets. The average length of care for women 65 years of age or older is 3.7 years, and for men, it’s 2.2 years, but 20% of people 65 years or older will need five or more years of care. Costs vary by state, and the provider being used and the type of services being provided can also influence long-term care costs. The average national annual cost of long-term care are as follows:

• Home health care: $45,760 – $46,332
• Adult day health care: $17,680
• Assisted living facility: $43,539
• Nursing home care: $82,125 – $92,378

Costs for some providers are all-inclusive, and other providers have a flat fee then add extra charges for services beyond room, food, and housekeeping.

Health insurance only provides limited coverage for specific types of long-term care medical needs, and disability insurance doesn’t provide any long-term care coverage. Health insurance, including Medicare, generally covers skilled nursing facility stays after a recent hospitalization and medically necessary skilled home care. Disability insurance is only designed to provide an income to a person when they become disabled and are unable to work.

Long-term care insurance is specifically designed to cover the cost of long-term care services that are provided in a variety of settings. This insurance is comprehensive, and it’s flexible enough to provide a person with individualized coverage. The monthly premiums for a long-term care insurance policy are based on a person’s age at the time they apply for a policy, the type of policy they apply for, and the type of coverage they select.

Long-term care is a complicated process that involves family, nursing care representatives, and in some cases, social workers, and legal counsel. It can be a delicate time for everyone involved. It’s important to take the time to make the right decision so that the person who needs these services can be satisfied with the decision.

Charitable Giving in Retirement


As you planned and saved over the years of your working life, you might have also considered those in need. By year-end, you may have made enough charitable donations to qualified organizations to also enjoy the benefits of charitable giving. You felt good by doing good.

Now that you’ve retired, you can still take advantage of many charitable giving tax benefits. Here are some of the ways to do that.

Plan for giving

To start taking advantage of charitable giving during retirement, calculate your taxable income for this year and how much you can afford to give. You can use the standard deduction, which has increased considerably. You can deduct up to $600 in cash contributions to eligible organizations for the 2021 tax year. The maximum deduction for 2022 has not been determined but is likely to be either $300 or $600.

In any case, if you’re not sure how you’ll file or what your income might be, the best place to start is last year’s return. Unless your income or employment status has changed markedly, your prior year return is a good initial guide.

As noted, the IRS permitted standard-deduction taxpayers to deduct charitable donations of $300 in 2020 and $600 in 2021. The deduction should be available for 2022 gifts, although the IRS has not determined the allowable deduction.

Maximize your benefits

Here are other donation types which benefit not only the target organizations but also your own tax bill and pocketbook.

Qualified charitable distribution

You have the option to make a qualified charitable distribution directly from your IRA  to the charity of your choice. By contributing directly from your IRA, you can avoid paying income tax on the distribution. It also works when you must take Required Minimum Distributions (RMD) but don’t need the distribution for your daily living expenses. You can contribute up to the full amount of your RMD avoiding any tax consequences on the RMD for that year.

Form 1040 instructions explain how to account for charitable deductions. If the contribution came from a non-deductible IRA, additional tax documents may be required. Consult your tax professional for additional information.

Charitable gifts of assets

You can also make charitable gifts of assets, such as appreciated stocks or bonds. You won’t have to pay capital gains taxes on those instruments. By donating them, you deduct their appreciated fair market value without raising capital gains by selling them to donate cash to the qualified charitable organization. This allows the amount you would have paid in taxes to stay with the charity, which doesn’t pay taxes.

Once again, you’ll want to consider whether the standard deduction makes this a useful strategy for you or not. If you’re not itemizing, a $300 or $600 stock donation won’t avoid a lot of capital gains taxes.

Donor-advised funds

If you’re planning a lot of charitable giving and have sufficient assets, you can consider creating a donor-advised fund. This method lets you make distributions to the charitable organizations of your choice. A donor-advised fund is a separate account operated by a qualified charitable organization, called the sponsoring organization. The account includes contributions made by various donors.

As the donor, when you make a contribution, the organization has legal control over it. However, you or your representative can still advise about the distribution of funds and the investment of assets in the account.

You can deduct a significant portion of your donor-advised fund contribution. However, you should know that the IRS is aware of abuses related to the use of donor advised funds. So, do your due diligence and talk to your financial advisors to find the best options for you.

Charity still begins at home

As you can see, retiring doesn’t mean you can no longer make contributions to qualified charitable organizations. In fact, with IRAs and other retirement vehicles, it can even be easier to make them.

Another benefit of retirement is that you can make a gift that most charitable organizations are desperate for in today’s busy world — your time. At the beginning of this century, one in four Americans volunteered. Today that number is far less, especially since the pandemic began. Think about ways that you can be of value, both as a giver and a volunteer or even a cyber-volunteer. You’re still feeling good by doing good.


nest egg

No matter how much you have saved, it’s important to remember that your returns will always vary. Instead of planning on regular returns each year, consider planning for volatility by varying what you withdraw and when.

Be Ready to Flex

Since the bond market is extremely low, your retirement investments are probably concentrated in stocks. When the return is good, it may be tempting to set your withdrawal rate a bit higher than 4%, but when the return drops or the market contracts, you will be better off having more money available to buy back into the market.

Hold Off on Social Security
If you’ve included social security dollars in your retirement calculations, it may be best to hold off until you’re at least 67 years old to get your best benefits from what you’ve earned. Before choosing your retirement date, carefully review any pension benefits you’re entitled to make sure that you:

  • retire at the right time
  • gain the full benefits of health insurance

If you’re not eligible for Medicare at the time you plan to retire, you may consider starting your pension before you apply for social security for an easy transition from pension to social security.

Phase Out of the Office
Instead of leaving the office cold turkey, you may have better luck phasing out of employment. For many professionals, their workplace has been a place for socialization as well as professional fulfillment. Many workers face a big emotional boost right after retirement but can struggle with post-retirement depression. To protect yourself from that feeling of social isolation, consider doing either part-time or consulting work to stay connected and keep your income flowing to avoid pulling cash from your retirement in the event of a market contraction.

This part-time connection will also allow you to keep a schedule and maintain a sense of continuity in your daily activities. If you choose to work in the morning and take a class in the afternoon, you can expand your social connections, built community, build a new schedule and keep earning.

Watch for Bargains
As noted above, if you experience a market contraction, having some cash to put back into the market can add to your nest egg. If you want to do other activities with your retirement dollars, you now have the time to watch for bargains. For example, if you’re interested in taking a cruise, you may get a much better price flying out of a city on the southern or western coast.

As a retiree, you have the time to make arrangements to get to these port cities. For example, if you live in the Midwest and are interested in a cruise to see the glaciers in Alaska, you have the time to take the train through the Rockies, enjoy Seattle, and then cruise to Alaska.

Be Ready to Buy

Keep an eye out for bargains to keep your expenses low. This can mean buying a smaller home to lower your maintenance labor and free up your time; keep the profits from the sale of your existing home handy so you can either invest in products that will pay off later or use part of it to treat yourself on an item or activity that you’ve always wanted to enjoy.

Many retirees and those approaching retirement have faced a lot of uncertainty in the past 15 months. Trying to be certain of your retirement funds means breaking away from the yearly focus on 4% of your total investments. Instead, consider doing your best to take out what you need for the bargains that matter to you, don’t go cold turkey on your employment, and do your best to hold off on drawing social security until you reach full benefit age.

retire young

When it comes to retiring early, some of the benefits are obvious. You get to live your life without the constraints of work, and you are able to pursue your own interests. But there are other good reasons for retiring early, and there are some reasons why retiring early is not the greatest idea.

Your Dedication is Gone

One of the good reasons to retire early is that you are simply not dedicated to working anymore. When you are no longer emotionally interested in working, your performance deteriorates and your company suffers.  Working Took its Toll
In some professions, such as construction and law enforcement, the physical and emotional demands of the job can become too much over time. After a few years in a high-risk profession, your body and mind have simply had enough and it is time to go home and rest.

Your Finances Become More Flexible

Most people do not realize how expensive it is to work until they are no longer working. When you work any job, you incur expenses such as wear and tear on your car, transportation expenses such as gas or bus passes, work clothing costs, daycare and miscellaneous medical costs for work-related injuries. If you have planned your finances to allow yourself to retire early, then you will find that your money goes much further when you are not working.

Your Health Could Suffer

For some people, retiring early means abandoning the daily physical activity working required and giving up a big piece of their identity. Retiring early can cause physical and mental problems that could become very serious over time.

You Lose Your Social Circle

After years of working, you tend to take for granted the notion that you will see most of your friends at work five days out of the week. Even people who think that the people they work with are only acquaintances suddenly find that the loss of the social circle they developed at work is devastating.

You Didn’t Plan Well

When you retire before the age of 65, you run the risk of losing out on health insurance. Medicare automatically kicks in for every American when they turn 65, but what would you do until that age? Did you plan your retirement finances right, or will you run out of money? Many people forget to take inflation into account when they plan their retirement, and that makes retiring early financially dangerous.

There are two sides to every story, and that includes the story that goes with retiring early. The idea of walking away from work before the age of 65 can sound appealing, but there are plenty of variables to consider before you make that decision. If you do want to retire early, then talk about it with your family and ask your financial adviser if you have structured your savings properly to be able to live without a paycheck for the rest of your life.


Planning for retirement sometimes is filled with numerous preparations.  One step at a time you put your life and your finances in order so that the remainder of your years are spent enjoying the lifestyle and security you have worked so hard to achieve.

Preparing for retirement includes steps to prepare your children for the decisions you have made. Sitting down with them and laying out your plans is an important step in the process and one that can prevent misunderstandings and mistakes along the way.

Let Them Know Long Before the Retirement Party

When the timeline for retirement grows closer, make sure that you fill your children in on the development of your plans. Some experts advise letting kids in on it when you are about five years away from retirement to prevent catching them by surprise. If your plans include downsizing to a smaller home or a move to a new location your children may need time to prepare.

Retirement means a change in lifestyle. For some people, this means a reduction in monthly purchases. Inform your children of these changes so that they can be prepared and less likely to worry that you are struggling financially.

Set Them Free

Children who are financially dependent on you may need time to get their own houses in order. Your retirement plans could very likely require you to pull back any financial support. Chances are you may need to issue deadlines to your kids if they need to begin paying for their own cell phones, insurance, or rent each month.

Cutting your kids off financially can cause rifts in your relationship. It may help to hold a conversation long before the time frame becomes critical. Help formulate a plan to remove your children from their dependency on you. Keep them involved in the process so that they have the time to prepare themselves and their own financial future.

Communicate Your Plans

Nearing retirement means you are getting older. Any discussion about aging requires a reality check about the potential effects of illness and other conditions can have on your lifestyle. Now could be an ideal time to layout your plans and your wishes to your children, especially if they could be tasked with making decisions for your future.

Communicate your wishes and desires and inform your children where important documents are located. Include a medical power of attorney, financial power of attorney, and other medical directives along with other financial documents. If you choose one of your children to act as an executor in your will or a beneficiary to insurance policies you will need to provide them with copies of your documents.

Discuss Your Final Plans Now

While the topics you might discuss with your children prior to your retirement might include your finances and your travel plans, it may also be a good time to fill them in on your final wishes. A discussion about your funeral plans may not be a fun conversation to have, but it is an important one.

Disclosing your wishes for your belongings now is another part of sharing your final plans. If you have multiple children and grandchildren giving them explicit directions about who gets what when you pass on may help save years of sibling strife in the future.