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How to Manage Taxable and Non-Taxable Income Sources at Retirement

Written by: MJ Gissas

Preparing for retirement means, for most people, investing early in retirement accounts, considering the weight of available pensions, and keeping as much income flowing as possible post-retirement. Some of those income sources may be taxed even after retirement as you begin to withdraw money from them. To keep your budget predictable, you must learn to manage both your taxable and non-taxable income sources.
To do so, begin by familiarizing yourself with what kinds of income are taxable and what kinds are not.

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Taxable Income

While this is not an exhaustive list, the types of income below are the most common taxable income types that are typical of the income sources of retired men and women.

  • Pensions & Annuities – Some, but not all, of employers offer pensions for employees who continually serve at the company for a predetermined number of years. Certain pensions & annuities may be tax-free depending on whether contributions were taxed when deposited.
  • Salary – Occasionally, men and women seek employment to add to their sense of duty and happiness after retirement. These wages are taxed as they would be before retirement.
  • Awards – You may receive a substantial award from your employer just before retirement as a thank you for your years of service. These awards are counted as part of your standard income for the year and will be taxed accordingly.
  • Alimony – Payments made as part of a decree of divorce are taxable, even in retirement. For those who pay alimony, however, the amount can be deducted from tax liability.
  • Disability Payments – Payments made from disability insurance policies are taxable if your employer has paid the premiums for the policy throughout the year.
  • Winnings from Gambling – Any extra money earned from casinos, raffles, bingo, lottery, or other sweepstakes will be taxed.

Though these sources of extra income that are common to retirees are subject to taxes, they can still greatly supplement the size of your retirement accounts. For bookkeeping, organize these income sources separately from your non-taxable income, calculate your tax liability on all sources, find the total tax liability in dollars, and subtract it from your total income of both taxable and non-taxable sources to help solidify your budget.

Non-Taxable Income

The list of non-taxable income is also not exhaustive, but these income sources listed below can contribute greatly to post-retirement budgets.

  • Roth IRA Withdrawals – Because contributions to a Roth IRA are taxed when deposited, withdrawals on the account are tax-free after you turn 59 ½.
  • Social Security – Your post-retirement income may qualify you to receive social security benefits completely tax-free. Higher income increases your tax liability.
  • Veteran’s Benefits – Disability payments distributed by Veteran’s Affairs and approved by your branch of the military cannot be taxed.
  • Home Sale Profits – As much as $250,000 for single home owners or $500,000 for joint-filers in home sale profits are non-taxable if the owner or owners lived on the property for at least two of the five years of ownership.
  • Insurance Benefits – Money received in a lump sum for such payouts as life insurance death benefits or reimbursement for losses such as car accidents or fires are free from taxes.

Though some tax-free income sources such as casualty insurance proceeds are not predictable, most sources and their totals can be controlled by you in retirement. Calculate withdrawal amounts for non-taxable income sources separately, then add them to the total income from taxable sources and subtract liability from the grand total to help keep your budget at an estimable number.

Budget for the Unexpected

After calculating income minus total tax liability, it’s important to leave room in the budget for expenses that you did not expect. Life changes just as suddenly post-retirement as it does before retirement, so make room in your budget for your tax liabilities to change due to unexpected expenses or prizes and winnings that you were unable to predict.

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Americans for Life Financial Services offers retirement solutions for institutional investors and individuals. Knowledge and results help our clients make informed decisions to meet their financial goals. 

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