Retirement Tax Issues You Could Face In Retirement

Does your retirement plan consider tax issues? It should -- or it could cost you valuable post-work money.

Taxes don't end when you stop working. Federal and state tax issues come into play in several retirement income areas.

The key focus of all retirement plans is ensuring you have enough money to live the retirement lifestyle you want. While you were working, you took advantage of workplace savings accounts such as 401(k) plans and individual retirement accounts.

If your IRA is a Roth account, you don't have to worry about tax issues with the Internal Revenue Service. You paid taxes on the money before you put it into your Roth IRA, and its earnings have grown tax-free. That means you don't owe the IRS anything on your withdrawals once you retire.

But if you're depending on traditional IRA or 401(k) funds, you will owe taxes. You never paid income taxes on the workplace plan or deductible IRA contributions. Plus, the earnings of these accounts are tax-deferred, meaning you owe tax at your ordinary income tax rate on money you take out in retirement.

And if you've delayed distributions so as to postpone those taxes for as long as possible, remember that the required minimum distribution, or RMD, rules compel you to withdraw certain amounts when you turn 70 . The IRS has life-expectancy charts, the most common one being the Uniform Lifetime Table, that help you calculate how much to withdraw.

Your private retirement accounts are designed to supplement your Social Security benefits.

But your added retirement income, whether from an IRA or pension plan, investment income or a job (including self-employment), could lead to taxes on at least part of your government benefits.

Retirees could pay taxes on up to 85 percent of Social Security benefits, says Mike Piershale, a Chartered Financial Consultant and president of Piershale Financial Group in Crystal Lake, Ill.

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Don't fall into these retirement tax traps