Not everyone realizes that Social Security benefits can be subject to taxation in certain circumstances. Those with additional income – wages, interest, dividends, and other taxable income reported on your yearly tax returns are generally subject to taxation.

The Social Security Administration’s website lists the following thresholds for taxable income:

• Those filing as individuals with $25,000 to $34,000 in taxable income may have up 50% of their Social Security benefits taxed.
• Those filing as individuals with more than $34,000 in taxable income may have up to 85% as their benefits taxed.
• Those filing a joint return with a combined income between $32,000 and $44,000 may have up to 50% of their benefits taxed
• Those filing a joint return with a combined income more than $44,000 may have up 85% of their benefits taxed.
• Those who are married and file a separate tax return will likely pay taxes on their benefits.

Gains collected on investments are subject to taxation, even in retirement. Depending on if the gains are ordinary dividends or qualified dividends, you will face different liabilities, with the qualified gains generally receiving more favorable tax treatment.

Distributions from traditional 401(k)s and IRAs will generally be taxable as ordinary income upon distribution, since contributions are typically made with pre-tax dollars. Additionally, you may be subject to an early withdrawal penalty if you take a distribution before age 59 ½.

Since contributions to Roth IRAs and Roth 401(k) accounts are made with after-tax dollars, distributions and gains will be, in general, tax-free.

The tax environment you retire into will affect your retirement funds. If you are a few years away from retirement, you may not retire into a significantly altered tax environment, though it is certainly possible. However, the further you are from your retirement event, the more opportunity there is for changes in the tax environment that will directly impact you.