About 66% of adults in or near retirement don't understand how capital gains taxes affect their income in retirement, according to a recent Nationwide survey. The short answer is it won't have any impact on your retirement income unless you have some savings in a non-retirement investment account. But that doesn't mean that you don't pay any taxes on your retirement savings at all. Here's an overview of what you need to know about taxes in retirement.

Capital gains taxes

When you invest in a non-retirement investment account, you must pay taxes on any profit you make when you sell your investments. If you've held the investments for less than one year, this is considered a short-term gain and it is taxed at your standard income tax rate. But if you held the investment for a year or more, it then becomes subject to long-term capital gains tax instead.

Confused man looking at papers

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The amount you'll pay in long-term capital gains tax ranges from 0% to 20% and depends on your income and filing status. Here's a table to help you figure out how much you would owe on your 2018 taxes:

Tax Rate

Single

Married Filing Jointly

Married Filing Separately

Head of Household

0%

$0-$38,600

$0-$77,200

$0-$38,600

$0-$51,700

15%

$38,601-$425,800

$77,201-$479,000

$38,601-$239,500

$51,701-$452,400

20%

$425,801 or more

$479,001 or more

$239,501 or more

$452,401 or more

Data source: IRS.

Long-term capital gains tax rates are much lower than standard income tax rates, so holding your investments longer than a year is a simple way to reduce how much you'll owe in taxes. Depending on your annual income, you may be able to avoid taxes on your capital gains altogether.

Taxes on retirement savings

Traditional retirement accounts are tax-deferred, meaning that the money you contribute comes off of your taxable income this year but you have to pay taxes on your withdrawals in retirement. This can help you to reduce the amount that you owe in taxes because you'll likely be in a lower tax bracket in retirement than you are today. But the downside is that you don't get to take advantage of capital gains tax rates. Instead, you'll be taxed at standard income tax rates.

Then, there are Roth retirement accounts. Contributions to these accounts are made with after-tax dollars, so they do not come off of your taxable income this year, but the money is allowed to grow tax-free. You won't have to pay any money when you withdraw your Roth retirement savings, as long as you're over age 59 1/2 and the money has been in your account for at least five years.

How to minimize the taxes you owe on your retirement savings

The first step to lowering your taxes in retirement is to contribute to the right retirement accounts. Roth accounts are best for those just starting out in their careers and anyone who believes they're in a lower tax bracket now than they will be in retirement. If you believe you're in a higher tax bracket now than you will be in retirement, traditional retirement savings accounts are a better fit.

You're allowed to contribute up to $18,500 to a 401(k) in 2018 and $5,500 to an IRA in 2018. Adults 50 and older may contribute up to $24,500 to a 401(k) and $6,500 to an IRA. If you plan to contribute more than this, the extra will have to go in a non-retirement investment account. These accounts are funded with after-tax dollars and you will also have to pay taxes on your capital gains, but you can minimize how much by holding your investments for at least a year before selling.

Then, you have to think about how you're going to sequence your withdrawals in retirement. There are many approaches to this. Some people like to delay their Roth savings for as long as possible to take advantage of the tax-free growth, but this could raise your taxes during the early years of your retirement if you're relying heavily on your traditional retirement savings. Others like to take a proportional approach where, for example, if they have $750,000 in traditional retirement savings and $250,000 in Roth savings, they would withdraw 75% of their living expenses from traditional savings and 25% from Roth savings.

Remember, tax brackets change, so your plan must also be flexible. If the income threshold for your tax bracket rises, you may want to withdraw a little more from your traditional retirement savings than you had planned in order to conserve your Roth savings. If you run into any questions about the best plan of action, you may want to seek out a tax or financial advisor that can give you specific advice for your situation.

It's difficult to predict exactly how much you'll owe in taxes in retirement, but it's important that you have some idea so that you aren't in for an unexpected surprise come tax time. By keeping these tips in mind, you should be able to minimize your taxes and keep more of your savings for yourself.

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