From Kiplinger — 

As you work to accumulate retirement savings, it’s fun to contemplate all the cruises, rounds of golf and restaurant meals you have ahead of you. You’ve earned it! However, many retirees don’t take into consideration the cumulative impact of federal and state income taxes on withdrawals from their nest eggs.

“Finding tax-efficient investments is the key to successfully saving for retirement,” says financial planner Carlos Dias Jr., of Dias Wealth LLC. Unfortunately, most forms of retirement income — including Social Security benefits, as well as withdrawals from your 401(k)s and traditional IRAs — are taxed by Uncle Sam. And unless you live in one of nine states without a traditional income tax, you can expect your home state to ding you in retirement as well. (Taxes on retirees vary from state to state, so make sure you check our retiree tax map for each state’s overall tax impact on your retirement income.) So, do yourself a favor before you retire and take a look at the federal income taxes you’re likely to face on 10 common sources of retirement income.

Traditional IRAs and 401(k)s

Savers love these tax-deferred retirement accounts. Contributions to the plans generally reduce their taxable income, saving them money on their tax bills in the current year. Their savings, dividends and investment gains within the accounts continue to grow on a tax-deferred basis.

What they tend to forget is that they will pay taxes down the line when they retire and start taking withdrawals, and that those taxes apply to their gains and their pretax or deductible contributions. And at some point, you must withdraw money from the accounts. Required minimum distributions (RMDs) kick in at age 72 for holders of traditional IRAs and 401(k)s (age 70½ if you were born before July 1, 1949). (People who work past age 72 can generally delay taking RMDs from their 401(k)s until they retire.)

The tax rate you pay on your traditional IRA and 401(k) withdrawals would be your ordinary income tax rate.

Roth IRAs

Roth IRAs come with a big long-term tax advantage: Contributions to Roths aren’t deductible, but withdrawals are tax-free.

Two important caveats: You must have held your account for at least five years before you can take tax-free withdrawals. And although you can withdraw the amount you contributed at any time tax-free, you generally must be at least age 59½ to be able to withdraw the gains without facing a 10% early-withdrawal penalty

Social Security

Once upon a time, Social Security benefits were tax-free for everyone–but that fairy tale ended in 1983. For many Social Security recipients, the benefits still aren’t taxed. But others, depending on their “provisional income,” aren’t so lucky and may have to pay federal income tax on up to 85% of the benefits. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits, and add all of your tax-exempt interest.

If your provisional income is less than $25,000 ($32,000 for married couples filing a joint return), your Social Security benefits are tax-free.

If your provisional income is between $25,000 and $34,000 ($32,000 and $44,000 for joint filers), then up to 50% of your benefits are taxable.

If your provisional income is more than $34,000 ($44,000 for joint filers), then up to 85% of your benefits are taxable.

The IRS has a handy calculator that can help you determine whether your benefits are taxable.

Pensions

Most pensions are funded with pretax income, and that means the full amount of your pension income would be taxable when you receive the funds. Payments from private and government pensions are usually taxable at your ordinary income rate, assuming you made no after-tax contributions to the plan.

Stocks, Bonds and Mutual Funds

If you sell stocks, bonds or mutual funds that you’ve held for more than a year, the proceeds are taxed at long-term capital gains rates. These rates can be quite favorable. For the 2020 tax year, if you’re single with taxable income less than $40,001 or married filing jointly with taxable income under $80,001, your long-term capital gains are taxed at 0%.

For people with higher taxable incomes, the rates go up. The next rate is 15% (singles with incomes between $40,001 and $441,450, and married couples with incomes between $80,001 and $496,600). For people with incomes above those amounts, the top rate is 20%.

There’s also a 3.8% surtax on net investment income (long-term capital gains, dividends, etc.) of single people with modified adjusted gross incomes over $200,000 and married couples with modified AGIs exceeding $250,000. The 3.8% extra tax is due on the smaller of net investment income or the excess of modified AGI over the $200,000 or $250,000 amounts.

If you sell investments that you’ve held for a year or less, the proceeds (i.e., short-term capital gains) are taxed at your ordinary income tax rate.

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