Income Taxes, Retirement, and How to Prepare


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Retirement is a time full of change, especially in regards to finances. From the way you are receiving money to the way you are spending money, these changes will inevitably affect your taxes. Not properly preparing for retirement can be costly. Below are four factors that will change and what you should keep in mind when preparing for retirement.

Social Security

Social Security is the most obvious change to retiree’s incomes. Before age 62, the majority of people don’t have to worry about Social Security affecting their taxes. Everyone’s Social Security is taxed based on their combined income (Combined income = adjusted gross income + nontaxable interest + ½ your social security benefits) as well as how they file.

One thing remains the same though; no one pays federal income tax on more than 85% of their Social Security benefit.  For example, filing as an individual with a combined income under $25,000, you will not pay any federal income tax on your benefit. If your combined income is between $25,000 and $34,000, you will pay tax on up to 50% of your benefit.

If your combined income as an individual is more than $34,000, up to 85% of your benefit will be taxed.  These numbers change if you file a joint return, but the principle is the same: the more income you have, the more taxes you will pay on Social Security.


There are two types of IRAs, and the way in which yours will be taxed depends on the type you have. With a traditional IRA, you’ll be taxed on all withdrawals, as you did not pay taxes on this money going in to the account. If required minimum distributions (RMDs) are not taken by age 70 ½ from traditional IRAs, you will receive a very large tax penalty of 50% plus the income tax owe on it. You cannot take money from IRAs before you’re 59 ½, excluding certain exceptions (buying your first home, qualifying medical cost, etc.), or you receive an early withdrawal penalty. With a Roth IRA, you paid taxes on the money when it went into the account (or when you converted it from a traditional) and withdrawals are tax free. There are no required RMDs and the early withdrawal penalty will only apply to the earnings the account made, not the contribution put in. These tax structures remain even in death, so if you plan on leaving an IRA to your beneficiary, make sure to be aware of the kind of taxes they will have to pay on it.


Medicare is another piece of the retirement puzzle that is basically exclusive to people over 65.  Medical expenses are often the largest cost in retirement.  The good news is, a lot of the out-of-pocket costs, such as Medicare premiums and co-pays, are deductible, but only to a point. Currently, you are allowed to deduct these expenses that exceed 10% of your adjusted gross income. For example, if your adjusted gross income is $50,000, you can deduct any amount you paid over $5,000.

On the other hand, Medicare can cost you more money if you earn a higher income. This is referred to as IRMAA (Income-Related Monthly Adjustment Amount), which can increase the annual cost of Medicare over $6,000 per year. There are strategic ways to lower your taxable income to prevent this, including a Roth conversion as well as moving money into an annuity or life insurance policy. These are more complicated and, most likely, will require the help of a professional in which you can find at Cardinal Advisors.

Long-Term Care

Long-term care is something that most people will end up using but do not properly plan for. In planning for long-term care, it is important to know that there are tax breaks for qualified health costs and on premiums paid.  When paying for the policy, these premiums are deductible as long as they exceed 10% of your income, just like Medicare premiums. There is a limit on how large of premium can be deducted, which depends on your age (see here). Once the policy is in use, long-term care can be paid in a way to strategically take advantage of tax credits. Long-term care expenses are listed as an allowable medical cost in IRS Publication 502, meaning using your IRA money before other nonqualified accounts could make your IRA into a tax free Health Savings Account. This is a more complicated strategy that requires further information (more info on this here), but make sure to keep it in mind.

These four topics are just the beginning of taxes in retirement. Depending on your situation, there might be other aspects that you need to consider as a retiree. While it isn’t wise to target one issue while tax planning, it is beneficial to understand potential costs.  At Cardinal Advisors, we educate our clients on how taxes will impact their retirement and help them craft a strategy to approach these in the smartest way.

Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at

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