No one likes thinking about taxes, much less paying them. Nonetheless, you must overcome this aversion and make taxes a central topic of your retirement planning discussions. Your most important planning goal should be to ensure you have sufficient income in retirement that will last a lifetime.


You can’t spend money you don’t have. That’s a truism, but it sometimes gets lost in retirement planning. These discussions tend to focus too tightly on accumulating savings, and not enough on how the retirement saver will spend those savings or the income they generate. When you translate your retirement savings into retirement income, taxes matter.

Your retirement planning goals should begin with generating sufficient income to support something like your pre-retirement lifestyle, and ensuring that income continues for the rest of your life. You want to know how much money you can spend in retirement—that is, your after-tax retirement income. This isn’t news to any of us who have worked for wages or salaries. Every week, two weeks, or month, we receive a paycheck, but we can’t spend our gross wages or salaries. A portion must go to taxes. Most regular tax payments—for example, income taxes and payroll taxes for Social Security, Medicare, and unemployment insurance—are automatically withheld from that paycheck by our employer and forwarded to the relevant government agencies. The amount that’s left over is our spendable income, putting aside taxes you might pay separately related to other income, real estate, purchases (i.e., sales taxes), or investments.

While our paycheck experiences offer a valuable reference point, taxes get a little more complicated in retirement. This post offers general background about some of the tax issues associated with income components in many retirement plans: pension and annuity payments, retirement account withdrawals, Social Security benefits, and earnings. This is not a substitute for an in-depth discussion with your accountant or financial advisor. Consider it preparation for that discussion.

Three Important Principles About Taxes and Retirement

Three principles generally underlie the tax treatment of retirement savings and retirement income:

1. You will almost certainly pay taxes on income you save for retirement. The retirement planning question is, when? If you pay taxes on your income when you earn it, your after-tax income will not be taxed again. Subject to certain limits, however, you can save a portion of your pre-tax income in a retirement account (sometimes called a “qualified account”). For example

  • In 2019, employees can save up to $19,000 ($25,000 if age 50+) of pre-tax income in their employer-provided 401(k) plans.1
  • In some other employment-related retirement plans, like a Simplified Employee Pension-Individual Retirement Account (SEP-IRA) plan, the amount of pre-tax income you may contribute could be higher.2
  • In 2019, most individuals can save up to $6,000 ($7,000 if age 50+) of pre-tax income in an Individual Retirement Account (IRA).3

2. If the money in your retirement account grows in value, you likely will be taxed on that growth, later.

3. While pre-tax income and any earnings sit in your retirement account, they will not be taxed. Instead, they are generally taxable when withdrawn. Of course, the government knows that and wants you to pay taxes, eventually. So, the IRS has “required minimum distribution” (RMD) rules that generally require you to withdraw a portion of your funds from your retirement accounts each year beginning at age 70½.4

Let’s see how these principles play out with a few different forms of retirement savings and income.

Pensions and Annuities

As I explained in another post on the Studio, pensions and annuities*, along with Social Security, provide retirement checks† similar to your paychecks from work. But understanding and applying the tax rules‡ to these retirement checks can get complicated, so seek help. Nonetheless, our general principles apply.

  • If you did not contribute to your annuity or pension, or contributed only pre-tax income, then the periodic payments you receive from these sources are fully taxable.5
  • If you contributed after-tax income to your pension or annuity, then this money will not be taxed again when returned, but the remaining value of your payments—including any earnings—may be taxable.6

Two pieces of good news about pensions, annuities, and taxes. First, your federal (and perhaps state) taxes will be withheld from your retirement checks, just like your paycheck from work.7 So, tax compliance is easier. Second, because the essence of pensions and annuities is distributing money, the retirement checks are usually large enough to satisfy RMD rules.  Again, retirement made a little easier.

"No one likes thinking about taxes much less paying them. Nonetheless, you must overcome this aversion and make taxes a central topic of your retirement planning discussions. Your most important planning goal should be to ensure you have sufficient income in retirement that will last a lifetime."

Retirement Savings and Investment Accounts

The general principles also apply to other types of employer-provided retirement plans (e.g., 401(k), 403(b) and IRA). Most important, contributions to retirement savings from after-tax income won’t be taxed again when withdrawn in retirement. In fact, there are retirement savings accounts—Roth IRAs—specially created for after-tax income. Pre-tax income and any earnings in retirement accounts will be taxed when withdrawn in retirement, whether or not RMD rules drove the withdrawal.

Choosing a Roth IRA (after-tax contributions) or a traditional IRA (pre-tax contributions) partly involves betting on whether your tax rates will rise or fall. For many Americans, their income is meaningfully higher while working than after retirement; so, retirement puts them in a tax bracket with a lower rate. If everything else were equal, and Congress does not change the tax rates after you make your retirement contributions, traditional IRAs would seem to be the right way to go. But everything else isn’t equal.

Roth IRAs have two tax advantages. First, as noted, when investments held in traditional IRAs grow, that growth is taxed when you withdraw your money. For Roth IRAs, investment growth is not taxed provided the withdrawal is considered qualified (typically account owner must be age 59½ and the account must be 5 years old).8 So, if your investments grow a great deal, the difference in your tax bill can be significant. Second, RMD rules do not apply to Roth IRAs. You can keep your money in them as long as you live. So, the choice between a Roth and traditional IRA requires weighing these benefits against the lower tax rates your retirement is likely to produce. The right answer isn’t obvious. Also, higher income individuals are limited in contributing to Roth IRAs.Again, I would recommend you get help sorting this out.

A critical qualifier: these tax rules apply to withdrawals in retirement. Except for Roth IRAs, early withdrawals from retirement accounts are taxed and penalized with an additional 10% tax, unless they meet one of the narrow exceptions.10 “Early” generally means before 55 (or the ordinary retirement age) for employer plans and 59½ for individual accounts.11 You are allowed to withdraw any contributions that you made to a Roth IRA tax free and penalty free, at any age and without the account needing to be five years old.12 Earnings accumulated in a Roth IRA that are withdrawn early may be subject to taxes and tax penalties.13 Early withdrawals can be costly and you should avoid them except in dire circumstances. Simply, don’t treat your retirement account like a savings account.

Social Security Benefits

Your Social Security benefits may be taxable. Figuring out whether and how much requires applying a formula that considers other income you receive from wages, pensions, annuities, or other sources.14 None, 50 percent, or 85% of your benefits may be taxable; the correct answer is a product of the income figure your calculations generate. As is so often true with tax questions, the answer may not be obvious, so do not be shy about seeking help to do the requisite math.

The good news is you can arrange to have taxes withheld from your Social Security check to make compliance easier.15

Earnings from Work

Many people “retire” for pension, annuity, or Social Security purposes (i.e., they start collecting income from these sources), but continue to earn wages, salaries, or commissions from full-time, part-time, or “gig” work. In fact, if your body, mind, and spirit remain willing, working longer can be one of the best ways to improve your retirement income and reduce the risk you will outlive your retirement savings. However, any wages, salaries, or other income you earn are subject to the same federal income and other taxes that applied before you “retired,” with one notable exception.

If you claim your Social Security benefits before your “normal” or “full” retirement age as Social Security defines it (between 65 and 67 depending on your birth year) and you earn income by working, your benefits may be temporarily reduced. In 2019 (it changes each year), the reduction would be $1 of benefits for every $2 earned above $17,640, and $1 for every $3 earned above $46,920.16

This so-called “earnings test” seems like a tax.  It is not. This is widely misunderstood, and some retirement income decisions can be confused as a result.  As the Social Security Administration explains, any earnings-related reductions are not “‘lost.’ Once you reach [your normal retirement age], your monthly benefit will be increased permanently to account for the months in which benefits were withheld.”17 In other words, your earnings will result in a portion of your benefits being deferred. So, after-tax income you earn during this period ends up increasing the amount of your total retirement income.

On the other hand, if you claim Social Security benefits before your normal retirement age, your benefits will be reduced. This IS like a tax—your benefits will be permanently reduced, not deferred.18 If you can continue working through your 60s, the best way to maximize Social Security’s protected lifetime income is to wait to claim your benefits until after your normal retirement age up to age 70. You will collect full benefits and generous “delayed retirement credits.”19


No one likes thinking about taxes much less paying them. Nonetheless, you must overcome this aversion and make taxes a central topic of your retirement planning discussions. Your most important planning goal should be to ensure you have sufficient income in retirement that will last a lifetime. There’s no avoiding that taxes will affect how much income you have and, therefore, how long your retirement savings will last. So, sit down with a financial advisor or accountant you trust and build a retirement plan designed to meet your goals and pay your taxes.


1 “Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits,” Internal Revenue Service, November, 2018.

2 “SEP Contribution Limits (Including Grandfathered SARSEPs),” Internal Revenue Service, November, 2018.

3 “401(k) Contribution Limit Increases to $19,000 for 2019; IRA Limit Increases to $6,000,” Internal Revenue Service, November, 2018.

4 “Retirement Topics – Required Minimum Distributions (RMDs),” Internal Revenue Service, November, 2018.

5 “Topic Number 410 – Pensions and Annuities,” February, 2019.

6 “Taxation of Annuities,” Insured Retirement Institute, 2018.

7 “Pensions and Annuity Withholdings,” Internal Revenue Service, June, 2018.

8 "Understanding Non-Qualified Roth IRA Distributions,", 2019.

9 “Amount of Roth IRA Contributions That You Can Make for 2018,” Internal Revenue Service, October, 2017.

10 Internal Revenue Code 72(t), Interneral Revenue Service. 

11 Internal Revenue Code 72(t), Interneral Revenue Service. 

12  "Understanding Non-Qualified Roth IRA Distributions,", 2019.

13 "Understanding Non-Qualified Roth IRA Distributions,", 2019.

14 “Publication 915 (2018), Social Security and Equivalent Railroad Retirement Benefits,” Internal Revenue Service, January, 2019.

15 “Publication 915 (2018), Social Security and Equivalent Railroad Retirement Benefits,” Internal Revenue Service, January, 2019.

16 “Exempt Amounts Under the Earnings Test,” Social Security Administration, 2018.

17 “Exempt Amounts Under the Earnings Test,” Social Security Administration, 2018.

18 “Benefits Planner: Retirement,” Social Security Administration, 2019.

19 “Benefits Planner: Retirement,” Social Security Administration, 2019.


*What is an annuity?

Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59 ½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.

 Guarantees are backed by the claims paying ability of the issuing insurance company.

 Tax deferral offers no additional value if used to fund a qualified plan, such as a 401(k) or IRA, and may not be available if owned by a “non-natural person” such as a corporation or certain types of trusts.

Investing involves risk including possible loss of principal. 

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

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