While retirement is a time to relax, remember taxes don’t retire just because you do.
Living on a fixed income makes managing your taxes crucial, as a misstep can eat away at your hard-earned savings.
With strategic planning, you can relax knowing your retirement taxes are properly managed.
Here is a roadmap on how you can manage your taxes during your retirement years.
Collecting Social Security
Several tax-related considerations come into play when collecting social security benefits, including when to start receiving benefits.
Taxpayers eligible for collecting social security can do so as early as age 62, but collecting at this age is considered early and reduces the amount individuals receive.
Taxpayers collect full benefits when they reach full retirement age (FRA), which for most workers currently at or near retirement age is 67.
It can pay to wait even longer, though, as taxpayers who delay collecting until age 70 receive increased amounts. For some, complete relaxation is not in the cards when they retire.
Individuals who continue to work while receiving social security benefits may receive reduced benefits if they are under their FRA and earning over a certain amount for the year.
For 2025, benefits are reduced $1 for every $2 an individual earns over $23,400 if they are under their FRA for the entire year.
Of course, there are income tax considerations, too. No one pays federal income tax on their entire social security benefit, but retirees may pay tax on a portion depending on their modified adjusted gross income (MAGI).
When calculating MAGI, retirees need to consider all sources of income they plan to draw from, including taxable retirement account distributions and brokerage account gains.
For 2025, the following thresholds apply for determining the amount of social security benefits included in federal taxable income:
- Less than $25,000 ($32,000 MFJ): benefits are tax-free
- Between $25,000 and $32,000 ($32,000 and $44,000 MFJ): up to 50% of benefits included in taxable income
- Greater than $34,000 ($44,000 MFJ): up to 85% of benefits included in taxable income
If a portion of their social security benefits are taxable, then retirees may want to consider withholding federal income tax from their monthly payments.
Withholding can help manage the tax owed throughout the year so taxpayers aren’t left to pay the entire amount when filing their income tax return.
Taxpayers can call the Social Security Administration (SSA) or send a Form W-4V, Voluntary Withholding Request to request withholdings.
IRA Contributions
A popular retirement savings account is a traditional IRA. Individuals can begin taking distributions from traditional IRAs penalty-free once they reach age 59 ½.
Typically, contributions to traditional IRAs are tax-deductible, so taxpayers must include distributions in taxable income and pay ordinary income tax.
While individuals can start taking traditional IRA distributions penalty-free after turning 59 ½, they don’t have to immediately.
Those who decide to wait to take distributions must remember that traditional IRAs have required minimum distributions (RMDs).
Once account owners reach the applicable age to trigger RMDs they must start withdrawing funds from the account by the required beginning date or pay penalties.
The required beginning date is April 1 of the calendar year following the year the individual reaches their applicable age. Individuals who turn 73 in 2025 must take their first RMD by April 1, 2026.
If retirees want to contribute to an IRA, but don’t want to worry about paying income tax on distributions during retirement, they should consider contributing to a Roth IRA as they generally don’t require RMDs.
You can either contribute directly to a Roth IRA if your MAGI is under the income threshold or contribute via a back-door Roth IRA by first making a nondeductible contribution to a traditional IRA and converting it to a Roth IRA.
Individuals who already have traditional IRAs can also convert the funds to a Roth IRA, but will need to include any tax-deductible contributions and earnings in taxable income upon conversion.
Other Taxable Accounts
Outside of tax-advantaged retirement accounts, many individuals save for retirement in brokerage accounts or other taxable accounts that offer flexibility when you take withdrawals.
The type of income generated from these accounts determines the taxation. Taxpayers pay ordinary income tax on interest income, but capital gains tax applies to selling stock or shares of a mutual fund.
Assets held for less than one year are considered short-term assets and subject to tax at ordinary tax rates, but assets held for more than one year receive preferential tax treatment and are taxed at lower rates.
Typically, investment income does not have withholdings, so individuals must make estimated tax payments or pay the balance due with their tax return.
Conclusion
While retirement is supposed to be relaxing, don’t be lax in managing your taxes. Staying on top of your retirement finances and planning for tax obligations can help sustain your lifestyle through retirement.
