How Taxes on Retirement Income Have Quietly Shifted — and Who Pays More Now
Written by
Travis Woods
Edited by
Zuri Anderson
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For those planning on retirement in the coming years, it’s important to understand just how much taxes on retirement income have quietly shifted in America.
Thanks to ever-changing social, economic and political landscapes, the older, more traditional means of retirement income taxation has changed — as well as who pays more on those taxes now.
Here’s How Taxation on Retirement Income Has Changed
Speaking to GOBankingRates, estate planning and investment advisor Greg Reese noted that retirement taxation has moved from defined benefit plans to defined contribution plans that are funded by employees on a pretax basis.
“The old-style pensions came with predictable, partially-taxable income,” Reese noted, “but today’s retirees rely on 401(k) plans and traditional IRAs, which are fully taxable when withdrawn.”
Additionally, the threshold for taxing Social Security ($32,000 for married couples) “has not been indexed to inflation, making more and more middle-income families subject to 85% of benefits being taxed.”
Here’s Who Pays More Now
“Married couples in the middle and upper-middle incomes from multiple sources” pay more in retirement income taxes now, according to Reese, thanks to Social Security, required minimum distributions (RMD), brokerage dividends and part-time work.
“This is where we see ‘stealth’ marginal rates defined by the tax code,” he added.
To counter this excess of taxation, Reese suggested that, prior to RMD age, taxpayers should coordinate withdrawals from taxable, tax-deferred and Roth accounts in order to optimize “income smoothing.” As he put it, “retirement is about spending efficiently, not just saving.”
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