I recently spoke with a prospective client who was adamant that he would not have to pay taxes in retirement. He read and printed an online article which indicated, “You will not owe these taxes in retirement.”
That myth was reinforced when his employer’s human resources associate person told him that he would not have to pay payroll taxes in retirement. Did you catch that? He was told he would not owe payroll taxes during his retirement years, which he misunderstood and thought he would not owe any taxes once he retired. Assuming you have income in retirement, you will be subject to at least some income taxes in your golden years.
This was a successful executive with a huge income before retirement. He was confusing taxes taken from his paycheck with only the payroll taxes. While it is true you won’t have to pay Social Security and Medicare taxes on withdrawals from retirement accounts, you will still be subject to income taxes at the state and federal levels. In his case, what began as a great retirement income was not looking so comfortable after taxes were taken into account. He went from expecting around $200,000 to spend in retirement to something closer to $140,000, or so, after taxes. That is still a nice income but 30% less than he expected. Side, not bigger problem, he was currently making over $500,000 per year, and spending a vast majority of his take home pay.
What Taxes Will You Owe in Retirement?
The good news is that income from a retirement account is generally worth more than income from working. Once retired and living on unearned income, you will no longer be paying Social Security and Medicare payroll taxes. You will still be subject to income taxes at the federal state levels. That assumes you don’t live in a state without an income tax.
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