Ugh, taxes. It'd be nice if you could leave them behind along with your job when you retire, but that's not in the cards. Even after you quit working, the IRS will insist on taking its cut of your taxable income. And if you fail to budget for taxes, your retirement income might end up being a lot smaller than you expect. That's why having a tax plan for retirement is so important: Not only will it help you prepare for those taxes, but it will give you a chance to reduce them as much as possible.

How income tax brackets work

The IRS uses a "marginal" bracket system to determine how much you owe in income taxes. So if you're in the 25% tax bracket, for example, you don't pay a 25% tax on all your income: You only pay 25% on the portion of your income that falls within the 25% tax bracket. Your income will be divided into three brackets, and each one is subject to a different tax rate -- 25%, 15%, and 10%. Any income from taxable sources for the year counts toward the income that's used to determine your tax brackets.

Tax brackets aren't used solely for income taxes, either. They also affect how much you pay in capital gains taxes. Both long-term and short-term capital gains tax rates are set based on your highest tax bracket. Short-term capital gains taxes are always the same rate as your top tax bracket, while long-term capital gains taxes use a different system that results in a lower tax rate.

Check to IRS for all my money

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Managing taxable income

Not all income is taxable. Income from nontaxable sources won't be taxed, naturally, and it also won't raise your top tax bracket. Nontaxable income can also reduce your tax bill in more indirect ways. For example, up to 85% of your Social Security benefits may be taxable -- but only if your taxable income from other sources exceeds certain limits. If you can keep your taxable income below those limits by drawing part of your money from nontaxable sources, you can keep your Social Security benefits tax-free.

So how do you get nontaxable income? For retirees, the most flexible source is a Roth IRA. With traditional IRAs, your contributions can be deducted from your taxable income in the year you make them, and the investments inside the account are sheltered from capital-gains and dividend taxes, but your withdrawals from the account are taxed as income. With Roth IRAs, on the other hand, you don't get a tax break on your contributions, but the money you take out of the account is tax-free (and as with traditional IRAs, the investments inside the account are not taxed). That makes Roth accounts a perfect tool for managing your taxes after you retire. Should you be fortunate enough to have a 401(k) through your employer, ask your HR representative if you can also open a Roth 401(k); these accounts offer the same tax advantages of a Roth IRA, but their contribution limits are higher ($18,500 versus $5,500).

Roth IRAs aren't the only potential source of nontaxable income. Life insurance benefits aren't taxed, and in some circumstances, annuities and disability insurance payments can also be nontaxable. Whether or not these benefits are taxed depends on whether you paid for them with pre-tax or post-tax dollars. Paying for future benefits with income that's already been taxed will make those eventual benefits partly or even completely tax-free.

Calculating your retirement tax bill

To find out how much you'll pay in taxes after you retire, start by adding up your income from tax-deferred retirement accounts (which includes traditional IRAs and 401(k)s) and toss in any income from part-time jobs and other taxable sources. Then you'll need to determine whether or not your Social Security benefits are taxable. If the sum of your adjusted gross income, nontaxable interest, and one-half of your Social Security benefits for the year exceeds a certain threshold, then you'll need to pay taxes on a portion of your Social Security benefits as well (more details here). Finally, add up your income tax and any Social Security tax to get your total federal tax burden for the year.

For example, let's say your tax filing status is single and you plan to take $50,000 per year from your traditional IRA after you retire. You can subtract a personal exemption and the standard deduction from this total, which for 2017 would result in a remaining taxable income of $39,600 (assuming you're under age 65 and thus can't take the additional standard deduction for seniors). That's enough to make your Social Security benefits partly taxable, so you'll need to factor that levy into your total tax bill. For the purposes of this example, we'll say your Social Security benefit is $1,500 per month, or a total of $18,000 in benefits per year.

You can use a Social Security tax calculator to figure out how much of your benefits will be taxable based on your income. In this case, the calculator will tell you that 85% of your benefits is taxable, so add 85% of $18,000 -- or $15,300 -- to your taxable income for a new total of $54,900. Based on the 2017 income tax brackets, that will result in a tax bill for the year of $9,463.75. You can see how paying such a sum to the IRS would be a real problem for a retiree who hadn't accounted for taxes in their budget.

Reduce your retirement tax bill

Having nontaxable sources of income in retirement can easily save you thousands of dollars. Consider what would happen in the example above if that $50,000 had come from a Roth IRA instead of a traditional IRA. In that case, neither the retirement account withdrawal nor the Social Security benefits would've been taxable, resulting in a tax savings of $9,463.75.

However, it's not necessary to have all your money in a Roth account, rather than a tax-deferred one. Having funds in both types of retirement accounts is generally the best deal tax-wise: You'll get some immediate tax savings on the contributions you make to your traditional IRA, and once you retire, you can take just enough each year from your traditional IRA to keep you below taxable levels while drawing the rest of the money you need from your Roth IRA.

If you don't have a Roth IRA at this point, now would be a good time to open one. Depending on how close you are to retirement, you may also want to do a Roth conversion and move some money from your tax-deferred accounts over to the new Roth account. However, be aware that doing so will require you to pay taxes on the money you convert, so don't move too much all at once; spread your Roth conversion out over several years to minimize the tax impact. This approach makes a Roth conversion a cheap and easy way to ensure you'll pay little to nothing in taxes after you retire.