Reducing Taxes When You Retire

Shawn Plummer

CEO, The Annuity Expert

This guide will help manage and reduce tax during retirement.

Retirement Taxes Overview

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Retirement Savings Tax Treatments

There are generally three categories of tax treatment for your retirement savings.

  1. Taxable: You pay taxes every year on your earnings,
  2. Tax-deferred: You don’t pay taxes until you withdraw money.
  3. Tax-free: You do not pay taxes on your earnings at distribution.

Each category has different rules, different tax treatments, and different advantages and disadvantages.

How is Retirement Income Taxed?

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Ordinary Income Tax vs. Capital Gains Tax

Ordinary Income

Interest-bearing instruments such as corporate bonds, savings accounts, money markets, and certificates of deposits are all taxed as ordinary income. Thus, interest, whether received or delayed, is recognized in the year that it is earned.

Keep in mind that bonds or any instrument sold on the secondary market can also be subject to capital gains tax on any appreciation that the taxpayer may experience from the sale.

Capital Gains

Capital gains tax can take the form of either long-term or short-term gain. Such assets will be subject to capital gains treatment when the asset is sold.

Whether the asset will receive favorable long-term capital gain treatment will be determined by whether it was held for the requisite time period, currently 12-months.

Long-term capital gain rates begin at 0% and can be as high as 20%.

If an asset was held for less than the requisite time period, the gain will be treated as a short-term gain and be taxed at ordinary income tax rates. It should also be noted that certain vehicles, such as mutual funds, can generate capital gains even if the taxpayer has not sold the mutual fund shares.

Internal trading of the mutual fund can result in gains independent of whether the taxpayer took any action. The capital gain treatment, either long-term or short-term gain, will determine how long the mutual fund owned the sold asset.

Retirement Income Plans and Taxes

Taxable Retirement Income

Income TypeHow Is It Taxed?
InvestmentsCapital gains or ordinary income tax
Social Security Income (A Portion)Ordinary income tax

Tax-Deferred Retirement Income

The taxable portion of all these retirement vehicles is treated as ordinary income, subject to ordinary income tax rates.

Income TypeHow Is It Taxed?
PensionsOrdinary income tax
Qualified Retirement Plans (Except Roth)Ordinary income tax
AnnuitiesOrdinary income tax

Tax-Free Retirement Income

Income generated from these retirement vehicles is generally tax-free, thus reducing the effective overall tax rate, allowing more after-tax spending money.

Income TypeHow Is It Taxed?
Roth Retirement PlansNot taxed
Life Insurance Cash ValueNot taxed
Roth AnnuitiesNot taxed
Municipal BondsNot taxed
Social Security (A Portion)Not taxed


That is why a retirement strategy that includes a strategy of tax allocation can be important. Much like you may use asset allocation to diversify your investments, tax allocation diversifies your retirement plan components into vehicles that are taxed differently.

That way, should tax rates or rules change for one part of your retirement strategy, you could shift to using retirement funds from another area.

The Annuity Expert can help you understand how various insurance products can help you achieve a tax allocation strategy and how different retirement savings vehicles can work together to benefit your income needs in retirement.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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