Retirement Savings and Taxes

Published February 4, 2025

Are you beginning to deposit money into a retirement account? Are you retiring soon and planning to start withdrawing your savings? Either way, you may have to pay taxes on those funds. In this article we’ll provide a brief overview of some of the things you need to know about your retirement savings and taxes.

Taxes on retirement contributions

In general, depending on the account you choose you may be able to make pre-tax contributions (meaning you pay no taxes on contributions and pay only when you withdraw the money), or you may be able make after-tax contributions (meaning you’ll get to make withdrawals without paying taxes on them).

Pre-tax contributions

Making pre-tax contributions to your retirement account could benefit you by giving you a lower overall tax liability when you file your taxes each year. To explain what that means, here is an example. If a single filer earns $50,000 gross pay annually, that puts them in the 22% tax bracket1. With a rate of 22%, they’ll pay approximately $11,000 in federal taxes. However, if they have a gross pay of $50,000 and contributed $10,000 to a 401(k) plan that year, their total tax liability would now be about $40,000. At a rate of 22% they would end up paying only about $8,800 when their annual taxes are due.

These are the types of retirement accounts which take pre-tax contributions:

After-tax contributions

After-tax contributions exist for “Roth” accounts. Roth accounts get their name from Delaware Senator William V. Roth Jr.2 who helped introduce Roth IRAs through part of the Taxpayer Relief Act of 1997.3 Senator Roth was a well-known advocate for tax cuts that would encourage economic growth. Roth 401(k)s were first introduced in 2001.4 Now, there are also Roth versions of 403(b) and 457(b) accounts.5

These could be beneficial to someone whose retirement income level pushes them into a higher tax bracket, requiring them to pay more taxes in retirement than they did when they were employed. The more money you have saved, the larger your required minimum distributions will be and the more income tax you may have to pay on those distributions. If you currently have a pre-tax retirement account, there may be options to switch it or have it “rollover” to a Roth account. Be aware that you will need to pay taxes on the funds that rollover during that year.

Taxes on retirement withdrawals

As noted above, withdrawals from pre-tax accounts do have tax consequences. These withdrawals are taxed at the rate corresponding to which tax bracket you fall under. Check out these helpful links from the IRS which explain how distributions from each account work. You can also find help with calculating what you might owe at irs.gov.

Withdrawals from Roth accounts are not taxable under certain circumstances. Other forms of retirement income that can be taxed are:

Pensions, Annuities, & Social Security

Pensions and annuity payments may be taxed by the IRS at your regular rate. However, certain types of pensions such as military or disability pensions may be entirely tax-free. A portion of Social Security benefits may be subject to income tax, depending on your total income. State income taxes on pensions, annuities, and social security will vary. When you’re thinking about which state to retire in, this is an important factor to consider.6

In Massachusetts, Social Security income is exempt from your gross income, meaning your payments will not be taxed. Most private pensions and annuity plans are taxable but many government pensions are exempt.7

Remember, everyone’s retirement journey is unique, so personalized advice is essential. Consult a financial advisor to create a tax-efficient retirement plan tailored to your goals and circumstances.

 

Open a Traditional or Roth IRA certificate

 

Sources:

1: https://www.irs.gov/filing/federal-income-tax-rates-and-brackets
2: https://www.investopedia.com/who-created-roth-ira-5219885
3: https://www.congress.gov/bill/105th-congress/house-bill/2014
4: https://www.congress.gov/107/plaws/publ16/PLAW-107publ16.pdf
5: https://www.irs.gov/retirement-plans/roth-acct-in-your-retirement-plan
6: https://www.finra.org/investors/learn-to-invest/types-investments/retirement/managing-retirement-income/taxation-retirement-income
7: https://www.mass.gov/info-details/massachusetts-tax-information-for-seniors-and-retirees

Disclaimer: This content is intended to provide general information and shouldn’t be considered legal, tax, or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your individual financial situation.