The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

Chapter 8. Taxes and Retirement

Benjamin Franklin famously said, "In this world, nothing can be said to be certain, except death and taxes."

Retirement is less certain these days—but if you do retire, expect to pay taxes. Your income may well be lower, which will lighten your income-tax burden, but a number of new factors come into play that affect your tax situation. These will concern your retirement savings, Social Security, and any continued income from work. In this chapter, we'll look at some of the key tax issues and decisions you'll face in retirement.

Walking Out the Door: Pension Decisions

When you retire, you'll need to make some decisions about your accumulated benefits, including any 401(k) or traditional defined benefit pensions. Enrollees in 401(k) plans always have the option to take a lump sum—and so can many traditional pension recipients. You may be tempted to do just that—although it's almost always better not to do so. Pension recipients usually do better opting for a lifetime-annuity payment option. If you have a 401(k), it makes sense to delay paying taxes on those assets as long as possible.

Traditional pension.

If your employer provides a defined benefit pension, then you'll pay personal income tax on distributions you receive from the plan. That's because private pensions receive favorable tax treatment at every other step along the way. Employers get to deduct their contributions. Investment earnings on plan assets aren't taxed, and employees aren't taxed on ...