Federal Income Taxes
Many sources of income you receive in retirement, including income from pensions, interest, and dividends, are subject to Federal income taxes. You also must pay Federal income taxes on money you pull from your 401k plan, 403b plan or traditional IRA. If you have a Roth IRA instead, the money you take out to meet your retirement needs is not subject to Federal income taxes. If you are retired, it is a good idea to do some preliminary tax planning to see how much you might owe, then start putting money aside for that upcoming tax bill.
If you plan to work part-time in retirement, you can expect to see payroll taxes deducted from your paycheck, just as you did when you held down a full-time job. These payroll taxes are used to fund federal programs like Medicare and Social Security, and you pay the same percentage of your income toward these taxes as you did before you retired.
The laws governing the types of income that are taxable vary from state to state, so you should check the rules governing your state carefully. Some states tax pension income and income from 401k and IRA plans, while others exempt those forms of income from taxation. Some states tax only earned income, meaning that your interest and dividend payments are not subject to taxation. You can obtain a blank tax return from your state's treasury department and use it to plan your taxes and estimate your liability.
In some cases you may be required to pay estimated taxes on a quarterly basis, rather than filing your taxes once a year on April 15. If you expect to owe more than $1,000 to the IRS, you should talk to your CPA or tax preparer about making quarterly payments to the IRS. If you receive a pension, your former employer may withhold taxes from your check, but the income you derive from other sources, like interest on your bank account, is typically not subject to withholding. For that reason, many retirees find that they must put aside money for taxes and pay on a quarterly basis.