Is retirement income such as Social Security and pensions taxable? If so, are they taxed as regular income?
I am trying to do some long term planning as to how much money I need to retire. Some people have told me that Social Security is not taxed. Others have said that a government pension is not taxed. I understand the taxes around 401K’s and IRAs. But the tax question around SS and government pensions will make a huge difference in my planning calculations.
Social Security IS taxed but things like disability which you get through social security is NOT. My father complained about this a LOT. Remember, the dollars you paid into SS were not taxed, but simply deducted from your income which WAS taxed. Any pension income is taxed. The advantage to being “retired” is that starting with age 62, you get a different arrangement with exemptions which effectively reduces your taxes. You need to discuss this with a financial professional who is up on the current legal situation for the tax details you need to make the assessment.
Pension income, definitely yes. For Social Security it depends on how much you make outside of social security TODAY. That might change and probably will in the future. The Social Security system as currently configured is doomed to bankruptcy. Every year the congress does nothing about it further guarantees that doom. George Bush tried to address this issue a few years ago and congress told him to stick it. Of course congress is in different system which is adequately funded by your tax dollars which explains their lack of concern for social security. You don’t say how old you are so I don’t know how threatened your benefits will be. But the future is sure to contain the following:
1) Means testing. If you have adequate other income, your benefits will be reduced.
2) Taxing benefits. If you have a certain amount of other income (including pensions) your social security benefits will be taxed at a lower threshold and a higher rate.
3) Higher taxes on current workers. Current workers will be required to pay higher and higher taxes to support the Ponzie scheme.
4) The retirement age for receiving social security benefits will be increased.
5) Social Security benefits across the board will need to be reduced.
All this is coming. And every year the congress does nothing about it, the severity of everything above will be increased. If you are young, your planning should rely very little or not at all on Social Security. Good luck.
I get a federal pension and there is a complex formula to determine the taxable amount because I contributed into it. Often if you do not contribute into a pension plan it is fully taxable. Mine is partly taxable as ordinary income. The higher your retirement income the more tax you pay. Similarly, my Social Security benefits are 85% taxable as ordinary income. Only a small percentage of my income is tax free. Currently, dividend income is taxed at a lower rate then ordinary income. Hope this helps.