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The Top Earners Will Pay 11% in Taxes in Retirement
But taxes are negligible for the lowest four quintiles, according to the Center for Retirement Research at Boston College.
The Center for Retirement Research at Boston College (CRR) has released an issue brief examining how much retires will owe in taxes on their retirement income.
It found the top quintile will pay 11% in taxes in retirement. However, taxes are negligible for the bottom four quintiles. For the top 5%, taxes are 16%, and they reach 23% for the top 1%.
The center says households face taxes on most components of their retirement income, including Social Security benefits, workplace retirement plans and capital gains taxes on any financial assets they sell.
As far as Social Security is concerned, only individuals with less than $25,000 and married couples with less than $32,000 of modified adjusted gross income do not have to pay taxes on their benefits. Above those thresholds, recipients must pay taxes on up to either 50% or 85% of their benefits.
“The taxation of withdrawals from a defined contribution [DC] plan is more complicated because the tax treatment depends on whether the plan is a traditional plan or a Roth, and how the retiree decides to withdraw money from the account,” the center says.
The center also notes that state personal income taxes piggyback on federal taxes. Thirty states and Washington, D.C., fully exclude Social Security from the state personal income tax. Twelve states tax all or part of Social Security in a way that differs from federal taxation. In addition, some states may exempt benefits for their public employees from taxation.
“In summary,” CRR says, “given the myriad ways in which retirement resources might be taxed, the potential liability could account for a significant share of retirement assets. … As households approaching retirement examine the resources they will have available, they may forget that not all of these resources belong to them. Thus, for many households reliant on 401(k)/IRA [individual retirement account] or other financial assets for security in retirement, taxes are an important consideration.”
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