5 Types Of Retirement Income And How They're Taxed

Retirement is supposed to be a time of relaxation and zero worries. Unfortunately, many retirees know very little about the tax implications of retirement incomes, which can cause a great deal of unwanted stress and confusion during the golden years. By better understanding what they are in for, retirees can get the greatest value out of their retirement income and spend more time enjoying the many fruits of their labors. To start off on the right foot, start reading this list of the types of retirement income and how they are taxed.

Pension

Different from a 401(k) plan, this type of retirement plan guarantees a certain amount of monthly income once an employee retires. Conversely, a 401(k) plan is determined by the amount of money an employee chooses to contribute during their career. While this type of retirement plan is becoming less and less common, it is still important to understand how it is taxed. Because most employees don't contribute to this type of retirement plan like a normal retirement account, the payout in retirement per month is usually fully taxed as regular income.

If an employer gave you the opportunity to contribute after-tax dollars to the employer-sponsored plan, this amount of money would not have to be taxed upon its distribution to the retiree. To figure out how much tax applies to an employer-sponsored plan, you have to figure out the annual value of the distributions. This value will put you into a tax bracket, which determines the tax taken out of every eligible dollar.

Continue reading to learn about bonds and mutual funds.