Lots of people have been wondering how retirement income is taxed. Different types of income have their own taxation rules, including how they are taxed and when they are taxed.
For example, there’s earned income, which generally refers to the wages you receive as an employee, and there’s unearned income, which generally refers to interest or dividends you receive from investments.
But what about retirement income? Is this taxed differently? If so, how?
Let’s take a look at how retirement income is taxed.
Retirement Income Tax Explained
Most people believe that all of their retirement income is taxable. There is, of course, a chance that the withdrawn money may not be subject to taxes at all.
Retirement is about so much more than financial issues; tax strategy is one area to keep in mind, so it can help you avoid potential money problems in the future.
Contact us if you have any questions or would like more information about how we can help with your investment needs.
Types of Retirement Incomes
There are three types of income you can receive in retirement: pensions, annuities, and retirement account withdrawals. Taxation varies based on the type of income. . The IRS defines a pension as an amount you receive after you retire from work because of your age or disability.
Annuities are monthly payments or lump-sum payments for a specific period or for life in exchange for providing investment or property to the payer.
You’ll need to consult with a tax professional before making any decisions on which retirement funds you should withdraw money from.
How much can I deduct?
You can deduct up to $6,000 for an IRA, 401(k), or other qualified retirement plans. There may be a limit on the deduction if you have a workplace retirement plan and your income exceeds certain levels. If you don’t have a workplace plan, the deduction decreases with income. You can’t deduct contributions to a Roth IRA.
Types of Expenses Section: Standard Deduction
The standard deduction is a set amount that you can deduct from your taxable income. For the 2019 tax year, the standard deduction is $12,200 for single filers and $24,400 for married couples filing jointly. The amount of the standard deduction depends on your filing status and whether you’re 65 or older or blind.
Also read: What is Insurance Brokerage?
If you’re 65 or older and/or blind, you may be able to take a higher standard deduction.
There are also some other deductions available, including :
- – Dependent care expenses
- – Certain medical expenses
- – Medical insurance premiums paid by self-employed individuals
- – Certain moving expenses
- – Tax preparation fees
- – Tax advisor fees
As always, if you have any questions about taxes, feel free to contact us!
Itemised Deductions Section: Are taxes deducted automatically?
Health Savings Account – HSA Health savings accounts are a type of savings account that allows you to set aside money for medical expenses, including insurance premiums. The money in the account is not subject to federal income tax, making it a great way to save for retirement. However, there are some catches.
ALSO READ: Tips to Help You Save and Spend Wisely
For one, you can only contribute to an HSA if you have a high-deductible health plan. Furthermore, HSA funds must be used for qualified medical expenses. If you withdraw money from your HSA for non-medical expenses, you will be subject to taxes and penalties.