Whether you want to retire early or right on time (whenever that is for you), taxes are probably top of mind.
You may think that ending W-2 income means no longer paying income tax. However, you'll likely still pay taxes on retirement income— and maybe income from Social Security benefits, annuities, and more.
This unexpected tax on the money that's been put away for golden years can catch retirees off guard, and it's important to retire knowing what to expect when tax time rolls around.
To ensure you're set up for success, here are 14 lies retirees often believe about taxes — and the truth of the matters.
Earn cash back on everyday purchases with this rare account
Want to earn cash back on your everyday purchases without using a credit card? With the Discover®️ Cashback Debit Checking account (member FDIC), you can earn 1% cash back on up to $3,000 in debit card purchases each month!1 <p>See website for details.</p>
With no credit check to apply and no monthly fees to worry about, you can earn nearly passive income on purchases you’re making anyway — up to an extra $360 a year!
This rare checking account has other great perks too, like access to your paycheck up to 2 days early with Early Pay, no minimum deposit or monthly balance requirements, over 60K fee-free ATMs, and the ability to add cash to your account at Walmart stores nationwide.
Don’t leave money on the table — it only takes minutes to apply and it won’t impact your credit score.
Apply for a Discover Cashback Checking account today
You stop paying taxes in retirement
/images/2023/08/14/older-couple-discussing-wills-with-lawyer.jpeg)
Unfortunately, no, just because you stop working, it doesn't mean you stop paying taxes.
Some states don't tax income (or at least retirement income), which will lessen your burden, but you likely can't avoid taxes altogether.
Luckily, there are several ways to grow your wealth as retirement approaches.
You'll be in a lower tax bracket
/images/2023/08/23/senior_gentleman_calculating_taxes.jpg)
In many cases, retirees don't end up in a lower tax bracket than they were in while working because they've set themselves up to maintain their preferred standard of living.
While they may not be earning a paycheck at the level they once were, they're still bringing that money in from somewhere — most likely withdrawals from a retirement account — and that counts toward their tax bracket.
You won't pay taxes on Social Security benefits
/images/2023/08/07/pen-held-over-a-social-security-benefits-form..jpeg)
Depending on your state of residence, you may have to pay taxes on Social Security benefits.
The states that tax Social Security benefits are currently Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.
If you’re over 50, take advantage of massive discounts and financial resources
Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.
How to become a member today:
- Go here, select your free gift, and click “Join Today”
- Create your account (important!) by answering a few simple questions
- Start enjoying your discounts and perks!
You’ll also get insider info on social security, job listings, caregiving, and retirement planning. And you’ll get access to AARP’s Fraud Watch Network to help you protect your money, as well as tools to help you plan for retirement.
Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $15 the first year with auto-renewal.
Moving to a state without income tax is a no-brainer
/images/2023/07/06/retiree-legs-in-pool.jpeg)
Retirees often flock to states like Florida, Nevada, Tennessee, and Texas, where there's no income tax, which means no tax on retirement income or pensions. It makes sense, right?
The math isn't actually so simple. In some states, sales tax and property tax are higher to offset the lack of income tax.
If you're a renter, prioritizing zero income tax over a high property tax makes sense. If you plan on owning expensive real estate, then the tradeoff might not be worth it.
Taxes are consistent among all retirement funds
/images/2023/08/09/document_with_title_401k_plan_on_a_table.jpg)
How you choose to save for retirement can actually impact how your retirement income is taxed.
For example, you can save pre-tax money in a retirement plan, such as a 401(k), where you'll pay income taxes when you withdraw the money.
However, in a Roth IRA, you'll pay taxes when you put the money into the account, and then the withdrawals are tax-free.
Trending Stories
You'll still have access to the same deductions
/images/2022/12/21/taxes_focus_on_charitable_deduction_section.jpg)
Many of the tax deductions available are designed to help taxpayers who are still building their lives, not those who are established. So if your home is paid off, you lose the mortgage interest deduction.
If you're no longer working, there's not a tax-deferred retirement plan to reduce your taxable income. And without small children, there's no way to claim dependents. This will impact your tax liability.
However, you can look into the Credit for the Disabled and Elderly, which could be worth up to $7,500 if you qualify.
Tax rates will stay the same
/images/2023/06/27/senior-couple-with-documents-planning-tax-and-home-budget.jpeg)
There's no guarantee that tax rates will be the same tomorrow as they are today.
Depending on political decisions, they could go up or down in the coming years, and you have to be prepared for the possibility of losing money you counted on if tax rates go up significantly.
On the other hand, if taxes go down, you could be in a position to you have more money in your pocket.
You can't contribute to an IRA after a certain age
/images/2023/06/18/documents-about-individual-retirement-account-ira-on-a-desk.jpeg)
If you choose to keep working, full-time or part-time, after you reach retirement age, you can continue contributing to an IRA.
There's no longer a cut-off age (it used to be 70½ years of age), and the limit is $7,000 for the 2024 tax year, with an additional $1,000 available for those over 50 as a "catch-up" allowance.
Withdrawals from all IRAs are taxed
/images/2023/05/05/roth-ira-adobe.jpg)
Not all IRA money is taxed upon withdrawal. If you've contributed to a Roth IRA, then you already paid the tax upfront.
A Roth IRA can be a smart move if you're making less as a younger adult and plan on being in a higher tax bracket by the time you retire.
In 2023 Americans lost over $10 billion to identity theft and fraud
That's right. According to the FTC, Americans lost over $10 Billion to fraud and identity theft in 2023.
But you can safeguard your data with all-in-one identity theft protection services from Aura which comes with $1,000,000.00 in identity theft insurance2 <p>Identity Theft Insurance underwritten by insurance company subsidiaries or affiliates of American International Group‚ Inc. The description herein is a summary and intended for informational purposes only and does not include all terms‚ conditions and exclusions of the policies described. Please refer to the actual policies for terms‚ conditions‚ and exclusions of coverage. Coverage may not be available in all jurisdictions.</p> per adult, to cover you should you have eligible identity theft-related losses.
An individual plan starts at $9 per month, and you can choose a family plan that outmatches most others - includes Dark Web monitoring to scour data breaches and leaks for your sensitive personal data — such as Social Security numbers (SSN), Medicare information, and phone numbers.
Before you make your next online purchase, protect what you’ve built for a fraction of what it could cost you if your data were compromised.
You'll stop paying Medicare tax in retirement
/images/2022/08/17/medicare_enrollment_form.jpg)
Those Medicare taxes that come out of every paycheck? They don't stop in retirement if you choose to continue working.
You'll continue to pay Medicare taxes on each paycheck you earn. But that's not a reason to stop working if you either need to or want to.
Annuities aren't subject to any tax
/images/2023/03/17/annuity-adobe.jpg)
In most cases, only the amount that you actually put into the annuity or the principal is exempt from tax.
All of the money earned on the annuity will be taxed at your income tax rate. There are, however, exceptions, depending on how your annuity was purchased.
You'll pay tax on life insurance proceeds
/images/2023/08/07/file-folder-labeled-as-life-insurance.jpeg)
If you're collecting life insurance payments following the death of a spouse, you won't have the extra stress of worrying about paying taxes on that income. Those proceeds from the life insurance plan will be tax-free.
However, any interest you receive is taxable, and you should report it as interest received.
Pensions are exempt from taxes
/images/2023/08/23/pensioner_saving_pension_for_utility_bills.jpg)
Many people who work in federal or state government jobs, utility jobs, education, protective services, and other similar careers still have access to a pension.
However, pensions are typically funded pre-tax, meaning you will have to pay income tax on that money when it is paid to you.
Luckily, certain states — those that don't tax income, plus Hawaii, Illinois, Mississippi, New Hampshire, and Pennsylvania — don't tax pension payments.
Part-time income is taxed differently in retirement
/images/2023/08/11/elderly-couple-enjoying-working-jointly.jpeg)
If you're working, you're going to pay taxes, and it doesn't matter whether you're retired or not.
Furthermore, if you are self-employed as a consultant, you will be subject to self-employment taxes, which could be greater than when you worked for a company as a W-2 employee.
Bottom line
/images/2023/04/11/senior-couple-reviwing-retirement-plan-using-laptop-at-home.jpeg)
Poor planning or lack of knowledge about tax liabilities and credits are two of the ways seniors may waste money.
That's why it's critical to learn how taxes will impact your retirement benefits and how much you'll pay on your retirement savings.
Keep in mind that regulations will change from year to year, so it's important to leverage free resources to find out the best way to keep more of your money in your own pocket.
FinanceBuzz writers and editors score products and companies on a number of objective features as well as our expert editorial assessment. Our partners do not influence our ratings.
Earn 1% cash back on up to $3,000 in debit card purchases each month.1 <p>See website for details.</p> No minimum deposit or balance. FDIC Insured.
Become a member and enjoy discounts on things like travel, meal deliveries, eyeglasses, and more.
Helps to identify and prevent fraud in real-time with 24/7 U.S.-based support.
Subscribe Today
Learn how to make an extra $200
Get vetted side hustles and proven ways to earn extra cash sent to your inbox.