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What Taxes Will Apply to My Retirement Savings?

Posted on in Taxation Law

San Jose retirement plan tax attorneyRetirement should be a carefree time for those who have earned the chance to enjoy the later years of their life. When you no longer have to work, you are probably looking forward to spending time with family and pursuing hobbies, and you will be able to use the money you have saved throughout your career to provide for your needs. However, one thing that retirees are often surprised by is the fact that the funds coming out of their retirement accounts may be subject to taxes.

Because retirees are on a fixed income, every dollar counts, and these taxes can cut into the amount of money you will be able to comfortably withdraw from your retirement savings. Fortunately, an experienced tax attorney can help you understand how you will be taxed during your retirement years.

Taxation on Retirement Income

Here are some common income streams for retirees and how each is taxed:

  • Social Security benefits: May be taxable based on income.
  • Pension income: You will be taxed at your regular rate as you receive the money from pension annuities and periodic pension payments. Some military pensions or disability pensions may be partially or entirely tax-free. 
  • 401(k)s and traditional IRAs: If a retirement account has been funded with pre-tax dollars, whether by you or your employer, income will be taxed when withdrawn.
  • Roth IRA: No taxes will be due on your earnings as they accumulate or when you withdraw funds from the account so long as you comply with withdrawal rules. In order to qualify for tax-free provisions on earnings and interest, you must have the account for five years.

Retirement Accounts and Divorce

Retirement accounts are treated like any other asset during divorce, and they are typically subject to division unless a prenuptial agreement is in place. In order to divide a retirement account, certain steps must be taken. Generally, this is accomplished by a qualified domestic relations order (QDRO), which is a highly technical legal document that should only be drafted by someone who is knowledgeable and experienced in this area of law.

There can also be numerous tax implications when a retirement account is divided in a divorce. For example, you may be able to withdraw the funds from retirement accounts during divorce without incurring a penalty, but the recipient will typically have to pay ordinary income taxes on the money. In many cases, a lawyer who practices in the area of taxation is needed to determine the potential tax consequences at this juncture. At the John D. Teter Law Offices, we are able to work with divorce attorneys to make sure that all tax issues will be identified and resolved. 

Call a San Jose, CA Tax Lawyer

Saving for retirement is no easy feat; it takes years of planning and foresight. Not taking tax consequences into account can undo these plans. By consulting with a trusted San Jose retirement accounts tax attorney, you will have the peace of mind that comes with knowing what to expect and understanding that you have made the best financial decisions for your situation. Call our office today at 408-866-1810 to schedule a meeting with our firm.

Sources:

http://www.finra.org/investors/taxation-retirement-income

https://www.cnbc.com/2018/03/07/dividing-401k-assets-in-divorce-can-be-an-expensive-minefield.html

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