How is retirement income taxed?


Quick Answer

Income from traditional retirement sources, such as Social Security, pensions, annuities, tax-deferred accounts and Roth IRAs, is subject to different tax rates, depending on the source. Some of these income sources are taxed as ordinary income, while others are subject to lower tax rates or are tax-free.

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Full Answer

Taxes applied to retirement income derived from Social Security income is dependent on the individual's filing status and provisional income, which is his adjusted gross income along with 50 percent of his benefits and any tax-free interest procured during the tax year.

Funds withdrawn from tax-deferred accounts, such as a 401k or traditional IRA, are taxed as ordinary income. Payments received from government and private pensions are also taxed as ordinary income, assuming the plans were free of after-tax contributions. However, withdrawals from a Roth IRA are tax-free if the policy is held for at least five years and the holder is at least 59 1/2 years of age. If these requirements are not satisfied, withdrawals are subject to not only taxes but a 10 percent penalty.

Profits derived from the sale of taxable assets, such as real estate, stocks, bonds and mutual funds, are subject to the capital gains tax. The precise rate is dependent on how long the securities are held. Short-term capital gains are applied to assets prior to being held for one year and are taxed as ordinary income, whereas assets held for longer than one year are taxed at a rate of 0 to 15 percent depending on the holder's tax bracket. Income derived from annuities is taxed beyond the principal amount, which is tax-free.

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