Retirement Taxes Aren’t Fair

retirement taxes

Retirement Taxes Stinkretirement taxes

Even though you have paid taxes your entire adult life your attitude about taxes change when you retire. Once you are retired, you suddenly realize that on a fixed income every penny counts. Retirement taxes can sneak up on you. During your working years you had cash-flow, you had a steady paycheck. You may have disagreed and grumbled a bit when real estate or income taxes increased but at least you had money coming in to make the payments. And if you needed to you could put in for overtime hours or adjust your finances somewhere else. But all of that changes once you retire. Regardless of whether or not you have the money to pay, retirement taxes are still owed.

What Are Retirement Taxes?

Plain and simple, retirement taxes are taxes due on the money you invested over the years into your 401(k)’s, 403(b)’s, 457’s and Traditional IRA’s.

For you see, that money has never been taxed. All of those retirement plans were tax-deferred investments. To help your retirement investments grow, the government allowed taxes on those investments to be held off. In theory, that was the benefit of investing into tax-deferred investments. You were delaying taxation until retirement. And in retirement you should be in a lower tax bracket, therefore, a reduced tax base. It is a very nice way of lowering your tax bill during your working years. Once you are retired, it is easy to forget about the benefit you enjoyed during your working years.

Time To Pay Upretirement taxes

Since most of your retirement investments escaped taxation while you were working, it’s time to pay up. And you pay up when you retire. Not all retirement investments will get taxed, it depends upon the investment type.

For example, if you invested into a Traditional Individual Retirement Account (IRA) or contributed to a 401k plan during your working years that money was considered by the IRS as tax deferred money. This money will be taxed as you make your withdrawals. But money invested into a Roth Individual Retirement Account (IRA) was already taxed so will not be taxed at retirement. Roth IRA investment money was taxed before it was invested. Keep in mind though that any earnings obtained in a Roth IRA will be taxed at withdrawal. Earnings on a Roth IRA were never taxed before.

You should talk with your tax professional about what tax rates you will personally be paying. Most of your withdrawals should be taxed at the tax rate you pay on current income. But what is considered income by the IRS? The most common sources of income would be withdrawals from your employer retirement accounts (401k, 403b, 457), Traditional IRA’s, Social Security benefits and income received from rental properties. Your tax adviser can provide you with additional income sources if need be.


If you miscalculated than taxes may dent your retirement plans a bit. If your calculations of how much retirement income you will have to live on did not include the taxes owed, you may come up a bit short. But, you should not allow the doom of taxes to change your attitude about your retirement. You worked hard throughout your career, now enjoy the fruits of your labor. Taxes are a part of life, they will never go away. So be aware of them and plan or adjust accordingly.


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