What do taxes mean for your retirement income?

Illustration of three people looking at various components that impact retirement income


A note on SECURE Act 2.0 

The content in this article may not reflect the latest information on retirement accounts and the Required Minimum Distribution age due to a recently passed law known as SECURE Act 2.0. Learn about key provisions of this legislation and reach out to us with questions. 

“Will my money last through retirement? What is the impact of taxes?” These are common questions when considering the many decisions and variables that impact your retirement income — which you may need for several decades.

To help you prepare for conversations with your Ameriprise financial advisor and your tax professional, here are answers to six key questions about the taxable aspects of retirement income.


1. After I stop working and my income is potentially lower, how can I take advantage of 0% or low tax rates?

During the time between when you stop working and when you begin taking required minimum distributions (RMDs) at age 72, you could consider two opportunities with your financial advisor:

  • Standard deduction shelter. If you’re able to cover expenses with savings or other cash accounts, consider taking advantage of the standard deduction ($12,950 single; $25,900 married filing jointly in 2022). Depending on your other income, you could use the standard deduction to shelter up to $12,950/$25,900 withdrawn from a taxable account such as a 401(k) or IRA every year without paying federal income tax on that money. Income above the standard deduction amount starts being taxed at the 10% rate.
  • 0% long-term capital gains tax rate. While your income is lower before RMDs begin, you may be eligible to realize gains at the 0% long-term capital gains rate. Taxable income limits applicable to the 0% long-term capital gains rate begin at $41,675 for those filing as single and $83,350 for those who are married filing jointly in 2022. The calculation includes other income and net realized long-term capital gain in determining what qualifies for the reduced rate.


2. How does my taxable income impact the cost of premiums when I apply for Medicare?

Your modified adjusted gross income — known as MAGI, which for these purposes is generally your adjusted gross income plus tax-exempt interest — is a big part of determining your premiums for Medicare. This includes Part B premiums for medical insurance and Part D premiums for prescription drug coverage.

Your Medicare cost for 2022 is likely based on the tax return you filed last year, for 2020 income.

  • If your MAGI in 2020 is $91,000 or less (individual tax return) or $182,000 or less (joint tax return), you’ll pay the standard premium for Medicare Parts B and D.
  • If your MAGI is higher than those thresholds, you’ll pay the standard premium and a Medicare surcharge called income-related monthly adjustment amount (IRMAA).

If you are paying the IRMAA surcharge and have a major life-changing event that reduces your income, contact your local Social Security office and complete form SSA-44 to request an IRMAA reduction.


3. Will my Social Security retirement benefits be taxed?

For many people, yes, but there are different taxation levels based on your modified adjusted gross income and filing status. In addition, certain states tax Social Security income. Your financial advisor and tax professional can provide guidance on the income impacts, both for when you file for benefits and later when a spouse passes away or when RMDs increase your annual income.


4. What is an RMD, and how does the RMD tax penalty work?

A required minimum distribution is the minimum amount you must withdraw annually from your retirement account when you are age 72 and older. It is recalculated each year. If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty equal to 50% of the amount not taken. Being aware of this ahead of time can help you avoid the penalty.

The simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they turn age 72 and continue RMDs by Dec. 31 every year after that. You can take more than the required amount — and people often do so. While the extra withdrawals don’t count toward RMDs for future years, they do reduce the base amount from which future RMDs are calculated.

Roth IRAs are exempt from RMDs while the owner is alive, but Roth 401(k) and Roth 403(b)s do have RMDs unless they are rolled over to a Roth IRA.


5. What are the tax implications for IRAs?

Traditional and Roth IRAs have their own benefits, but Roth IRAs may have a more long-term tax advantage given the withdrawals are tax-free when you meet certain requirements. You fund a Roth IRA with your paycheck or other taxed income and benefit from tax-free growth and tax-free withdrawals in retirement when you have met all the requirements.

If you believe your tax rates could increase in the future, converting a traditional IRA to a Roth IRA could help mitigate the impact of taxes. However, keep in mind that you will owe taxes on the conversion amount, which could also push you into a higher tax bracket in the year of the conversion. This may also raise your Medicare premium in a future year and could subject some of your Social Security retirement benefits to taxation.

In addition, the conversion is permanent. You cannot convert it back to a traditional IRA, even though this was possible in the past. Your financial advisor, along with your tax professional, can help determine the tax impacts of a conversion and how much to convert, considering those impacts.


6. Is a QCD more valuable than a regular charitable deduction?

For some people, a QCD has distinct advantages over a regular charitable contribution:

  • A QCD counts toward satisfying your RMD, up to $100,000. 
  • You can take a QCD whether or not you itemize deductions on your tax return.
  • If you use the standard deduction, you would generally receive no tax benefit from a regular charitable contribution.
  • A QCD is not included in your adjusted gross income (AGI). This could benefit you because AGI (or a modification of AGI) is used to calculate certain other taxes and benefits.
  • The regular charitable contribution deduction is typically limited to no more than 60% of AGI. This AGI limit does not apply to a QCD.


You have professionals who are ready to help

Given the many facets of taxes and their impact on retirement income, it’s important to connect with both your financial advisor and tax professional. Your Ameriprise financial advisor can provide you with advice personalized to your goals and needs before and during retirement, while also considering tax planning strategies appropriate to your situation. With their help, you can stay focused on the financial goals most important to you.