Ask an Advisor: I Have $800k in a 401(k) and $5,270 Monthly From Social Security and a Pension. How Much Will I Pay in Taxes in Retirement?

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My monthly Social Security is $3,178, my pension will be $2,090 per month and my 401(k) has $800,000. If I use the 4% rule, where do I stand tax-wise?

– Reggie

This is a great question. I hope it goes without saying, but without having all of your information and completing a full tax return I can’t give you an exact number. What we discuss here will cover the major items to help you estimate a rough ballpark figure of your tax liability. I still encourage you to do your research and modify the estimate to fit your unique circumstances or work with a tax professional.

Do you need help calculating your tax liability in retirement? Speak with a financial advisor today.

Start by adding up the components of your income that are taxed as ordinary income. In your case, that would be your pension and 401(k) withdrawals.

Since you have $800,000 in your 401(k) and plan to withdraw 4% in your first year, you’ll have $32,000 in income from your 401(k). Your pension will pay you $2,090 per month or $25,080 for the year. These two items together add up to $57,080. (And if you need more help managing your taxes in retirement, consider speaking with a financial advisor.)

You may have to include a portion of your Social Security in your taxable income. Unfortunately, calculating how much isn’t as straightforward as adding up your other types of income. But there’s good news: you’ll never have to pay taxes on 100% of your benefits.

You’ll need to calculate what the Social Security Administration (SSA) calls your “combined income.” To do this, you’ll add your adjusted gross income (AGI), any tax-exempt interest that you’ve collected and one-half of your Social Security benefits together.

For you, I’m assuming you have no above-the-line deductions or adjustments to income (though you may) so your AGI is $57,080 (reference form 1040). You didn’t mention any tax-exempt interest and half of your Social Security benefit is $19,068. So, your combined income is $76,148 under these assumptions. (Planning for Social Security is critically important and a financial advisor can help.)

A man who’s approaching retirement looks over his finances to estimate how much his taxes will be.

Admittedly this next part is complicated, so buckle up. Assuming you’re single since you didn’t mention any spousal benefits, the following income thresholds will determine how much of your Social Security benefits are taxable:

  • If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable.

  • If your combined income is more than $34,000, up to 85% of your benefits may be taxable.

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