When retirees look at all theirsourcesofretirement income, including SocialSecurity benefits, 401(k) plans, pensions, savings and other investments,they need to keep in mind: Some of thatwill go to the government in taxes.
To shed light on the tax burdens retirees face, researchers Anqi Chen andAlicia H. Munnell of the Center forRetirement Research at Boston Collegeestimated lifetime federal taxes for agroup of recent retirees in a paper presented at the Retirement and DisabilityResearch Consortium 22nd AnnualMeeting symposium in early August.
The researchers looked at householdsin which at least one earner claimedSocial Security benefits between 2010and 2018, which produced a sample of3,419 individuals and 1,907 households.
Average indexed monthly earnings areused to calculate Social Security earnings.
Here are some highlights from thefindings, which the researchers warnedwere “preliminary and partial.”
How much retirement moneydoes the average household have?Researchers totaled the financial resources available to the households in theirfirst year of retirement. They divided thehouseholds into quintiles, from the bottomquintile, which had less than $20,000 fromall potential revenue streams — SocialSecurity, defined benefit pensions, definedcontribution plans like 401(k)s, and financial wealth — to the top quintile, whichaveraged $323,000. The top 1% had roughly $1.7 million in retirement resources.
The researchers assumed thathouseholds wouldn’t draw from their
401(k)s or IRAs until required to do so
and would follow required minimum
distribution rules, and they saw two
alternative decumulation strategies.
First, they looked at households thatbegan withdrawing before they wererequired to. But they assumed withdrawals at the rate implied by the RMDrules. Another alternative they considered was using 401(k)/IRA balances atSocial Security claiming age to purchasean immediate annuity.
Finally, the researchers assumed thathouseholds with assets “outside of theseretirement arrangements” used onlyinterest and dividends to support theirretirement, or used their assets (payingtaxes on accrued capital gains) to buyan annuity while claiming their SocialSecurity benefits.
What’s the average federal taxrate? The researchers’ analysis is basedon the option of households taking onlyRMDs and living off the interest anddividends of financial assets. On average,the tax rate is 5.7%; however, it differsgreatly by income level.
Those in the bottom three quintilespay 0% or 0.3% in federal taxes whilethose at the top quintile are paying anaverage of 10.5%. The top 1% are payingfederal taxes at an average rate of 20.9%.
For those married with higherincome, annuitized DC plan assets canmake a difference in taxes. If a house
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By Ginger Szala