In an ideal world, workers would pay their tax debt to society and eventually be let off the hook by a certain age. But that's not how our tax system works.
As long as you're alive and kicking, the IRS is going to do its part to come after you for money. So it's important to know what taxes you may be looking at as a retiree. Here are some rules to keep in mind along those lines.
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1. Social Security benefits can get taxed
The monthly benefit you get from Social Security isn't necessarily all yours to keep. Rather, you may be taxed at the federal level depending on your provisional income.
Your provisional income is basically your non-Social Security income plus 50% of your annual benefit. And unfortunately, the thresholds at which taxes apply are pretty low.
If you're single, taxes on Social Security start to come into play with a provisional income of just $25,000. If you're married, that threshold rises to $32,000.
There are certain types of non-Social Security income that don't count toward provisional income, like Roth IRA withdrawals. When we talk about taxes on Social Security, it's not 100% of your benefits being taxed, either. But still, it's important to brace for the fact that some of that income might end up in the hands of the IRS instead of in your pocket.
2. HSA withdrawals may be subject to taxes
Health savings accounts (HSAs) are often hailed as fabulous savings plans because they're triple tax-advantaged. Contributions go in tax-free, investment gains are tax-free, and withdrawals are tax-free.
The latter, however, only applies to withdrawals taken for qualified medical expenses. If you tap your HSA in retirement for a non-medical reason, your withdrawal will be taxed.
You may be thinking, "But won't I be penalized in that case?" The answer is, not necessarily.
Once you turn 65, you can withdraw funds from an HSA for any purpose without a penalty. But non-medical withdrawals will result in a tax bill, so that's something to plan for and, if possible, try to avoid.
3. Not taking RMDs still has consequences
You may have heard that the rules surrounding required minimum distributions, or RMDs, have changed for the better -- and that's true.
Not only has the age for taking RMDs been raised to 73 for people born between 1951 and 1959 and 75 for those born in 1960 or later, but the penalty for not taking RMDs has decreased. However, it still very much exists, and it's 25% of the sum you fail to remove from your retirement plan.
There is the possibility of having that 25% penalty reduced to 10% if you rectify your mistake shortly after missing your RMD deadline. But either way, make sure to keep tabs on your RMD timing to avoid losing money needlessly.
Taxes are a perpetual part of life, and that means you're also looking at paying them later in life. But if you plan accordingly, they may not upend your finances quite as badly.
