If you have a pension coming to you when you retire, it could affect your taxes in the future. The biggest problem would be that you put a lot of your retirement money into tax-deferred accounts. As a result, it means that you will have to pay taxes on that money when you withdraw it, and the taxes will be at your regular tax rate.
If you are going to receive money from multiple sources, such as a 401(k), a retirement pension, and Social Security, your taxes could be considerable. You may also be counting on income from investments and possibly from employer matches, giving you considerable savings over the years. Your taxes on multiple sources of income could be shockingly large—greatly reducing the retirement money you are counting on during your retirement years.
Tax-Deferred Accounts Can Hurt in Retirement
If all of your income during retirement is from tax-deferred money, you could be very disappointed when you learn how much taxes you will have to pay during that time. Many seniors enjoyed getting a tax break by contributing pre-tax money into their retirement accounts.Social Security Benefits
The monthly cost of your Social Security benefits depends on whether you paid into it while you worked at a job where you paid into a pension fund. If you did not pay into Social Security, your retirement income could be reduced considerably, limiting how much you get from Social Security during retirement. The money you receive from a pension or other retirement account does not count as earned income, the Social Security Administration (SSA) says, and will not reduce your benefits.Medicare Costs
High-income earners will also have to pay more for Medicare. There is a means test based on your modified adjusted gross income. Individuals (in 2023) earning equal to or less than $97,000, and married couples filing jointly earning less than or equal to $194,000, pay $164.90 per month for Part B. There are several income categories with a corresponding rise in cost for Medicare. The highest payment of $362.60 is for individuals earning between $183,000 and less than $500,000. Married couples filing jointly will pay a maximum of $527.50 per month if they earn between $366,000 and $750,000. Additional costs are also added to Part D of Medicare based on income.Required Minimum Distributions (RMDs)
When you turn 72, you must start getting RMDs on some accounts. If you fail to withdraw the required amount each year, you will have to pay a penalty of 50 percent of the money you did not withdraw.Reduce Your Taxable Income With Roth Accounts
One of the best ways to reduce your income and still be able to build interest is to convert a retirement account to a Roth IRA or a Roth 401(k), or Roth 403(b). These accounts do not have RMDs, and will continue to build interest tax-free. You will need to pay taxes on the money that is converted, but all withdrawals after you retire are tax-free.Roth Accounts Have Income Limits
High earners are not allowed to make direct contributions to Roth accounts. Singles making between $138,000 and $153,000, and married couples filing jointly earning between $218,000 and $228,000 can only contribute limited amounts. People earning more than these limits cannot make direct contributions to a Roth account.Heirs May Also Receive a Tax Bomb
After you die, your heirs could also receive a tax bomb. When they receive the remaining funds in your IRA or 401(k), they also must pay taxes on money withdrawn from the account. Besides that, they must withdraw all of it within 10 years.If you will be getting income from a pension plan and other sources in your retirement years, you can prepare to reduce the tax bomb beforehand. Talk to a financial counselor to learn more ways to reduce your taxes and keep more in your pocket once you retire.