Retirement Income Taxes Are Changing—Who Pays More

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For those planning for retirement in the coming years, it is important to understand how much of the tax on retirement income in the US has quietly shifted.

Due to constantly changing social, economic, and political landscapes, the older, more traditional means of retirement income taxation have changed – as well as who now pays more on those taxes.

Here’s how taxation on retirement income has changed

Speaking to GeoBankingRates, estate planning and investment advisor Greg Reese said retirement taxation has shifted from defined benefit plans to defined contribution plans that are funded by employees on a pretax basis.

“Old-style pensions came with predictable, partially taxable income, but today’s retirees rely on 401(k) plans and traditional IRAs, which are fully taxable when withdrawn,” Reese said.

Additionally, the threshold for taxing Social Security ($32,000 for married couples) “has not kept pace with inflation, leaving more and more middle-income families subject to taxes on 85% of benefits.”

Here’s who pays more now

According to Reese, “married couples with middle and upper-middle income from multiple sources” now pay more in retirement income taxes, thanks to Social Security, required minimum distributions (RMDs), brokerage dividends, and part-time work.

“This is where we see ‘stealth’ marginal rates defined by the tax code,” he said.

To combat this excess of taxation, Reese suggested that, before the RMD era, taxpayers should coordinate withdrawals from taxable, tax-deferred, and Roth accounts to optimize “income smoothing.” As he said, “Retirement is about spending efficiently, not just saving.”