How can you generate the same amount of money in retirement as other people, but have much more to actually spend?
The “trick” is to keep the taxes on your retirement income low.
This may not be as difficult as you think. But it will require some planning and coordinating, along with recommendations from an experienced retirement income specialist. Here’s what you need to know.
Types of Taxes You Could Face on Retirement Income and Withdrawals
First, there are different types of taxes that you could face on your retirement income and withdrawals. These are:
- Income tax
- Capital gains tax
Income Tax
The U.S. income tax system is progressive, meaning that the more income you earn, the higher percentage of income tax you will have to pay. Income tax rates are as follows (for tax year 2022):
Income Tax Rates in 2022
| Product Name | 222 |
|---|---|
| Issuer | Allianz Life Insurance Company of North America |
| Type of Product | Fixed Index Annuity |
| Standard & Poor's Rating | "AA" (Very Strong) |
| Phone Number | 800-950-1962 |
| Website | www.AllianzLife.com |
Source: https://www.irs.gov
It is important to note that while the U.S. has been languishing in a low tax rate environment for many years now, that is likely about to change. Many people don’t know that over the past 109 years, the top federal income tax rate has fluctuated between a low of just 7% and a high of 94%.
In forty-nine of these years, this rate has been at 70% or higher. So, it is essential to have a plan in place for reducing or eliminating income tax that may be due in the future on your retirement income.
The Top Federal Income Tax Rates in the United States from 1913 to 2022
| End of Year | Gain or Loss | Value of Account |
|---|---|---|
| 1 | 10% | $1,000.00 |
| 2 | (-10%) | $990.00 |
| 3 | 10% | $1,089.00 |
| 4 | (-10%) | $980.10 |
| 5 | 10% | $1,078.11 |
| 6 | (-10%) | $970.30 |
| 7 | 10% | $1,067.33 |
| 8 | (-10%) | $960.60 |
| 9 | 10% | $1,056.66 |
| 10 | (-10%) | $950.99 |
Source: Inside Gov
Capital Gains Tax
Investors and retirees are subject to capital gains taxes on the profit from the sale of assets. The amount of tax that is due depends on how long the asset was held before it was sold, as well as your tax filing status.
For instance, profits on assets held for less than one year are short-term capital gains. These are taxed at ordinary income tax rates. However, assets held for longer than one year are subject to long-term capital gains tax rates. These rates are 0%, 15%, or 20% (in 2022).
Long-Term Capital Gains Tax Rates (in 2022)
| Growth Account Returns Based on Crediting Method | Annualized Return based on 62 year backtest with S&P 500 | Lifetime Income Benefit Rider Return Potential | Annualized Return based on minimum guarantee of income rider |
|---|---|---|---|
| Monthly Sum | 2.17% | 60 year old couple, taking income year 1, living to age 90 | 2.99% |
| Annual Point to Point | 2.14% | 60 year old couple, taking income after 10 years of deferral, live to age 90 | 3.88% |
| Monthly Average | 1.33% |
Source: Internal Revenue Service
Taxation of Social Security Retirement Income Benefits
Many retirees are also not aware that up to 85% of their Social Security retirement income benefits could be taxable. The amount of this taxable Social Security income is based on how much taxable income you generate from other sources.
There are several criteria that can make Social Security income subject to income taxation. These can include:
- Whether you’ve reached your full retirement age (FRA) when you claim your Social Security retirement benefits
- The amount of income you generate from other sources (if any)
With that in mind, based on your specific situation, you could be required to pay tax on a percent of your Social Security benefits (in 2022), if you meet the following:
- You file your annual federal income tax return as an individual and your combined income for the tax year is:
- Between $25,000 and $34,000 (if so, up to 50% of your benefits may be taxable)
- More than $34,000 (if this is the case, up to 85% of your Social Security benefits may be taxable)
- You file a joint income tax return with your spouse, and you have a combined income that is:
- Between $32,000 and $44,000 (in this case, up to 50% of your benefits may be taxable)
- More than $44,000 (here, up to 85% of your Social Security retirement income benefits may be taxable)
- You are married and you file a separate tax return.
Your combined income is equal to your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security retirement income benefits.
How to Keep Tax on Your Retirement Income Lower
The good news is that with the right type of planning in place, you could keep the tax on your retirement income lower so that you’ll have more net income available to spend. Some of the strategies for doing so include the following:
- Draw from tax-free income sources, such as the Roth IRA and loans from cash-value life insurance policies
- Wait to file for Social Security until at or after your full retirement age
- Pay attention to income tax deductions and claim them whenever possible (these can include medical deductions, mortgage interest, and charitable contributions)
- Try to keep total income from creeping into a higher tax bracket
- Withdraw long-term capital gains before short-term capital gains
Do You Have a Tax-Efficient Retirement Income Plan in Place?
Because everyone’s situation and objectives are different, not all tax-reduction or elimination strategies are suitable for all investors and retirees. Therefore, it is recommended that you discuss your specific needs with a tax planner and a retirement income specialist.
At Annuity Gator, we focus on helping consumers build retirement income plans that provide security and that are tax efficient. If you would like more information, set up a time to chat with one of our experienced professionals by calling (888) 440-2468 or sending an email to our secure online contact form. We look forward to assisting you.
