You might anticipate that retiring from work means finally getting a break from paying taxes. But in reality, the majority of retirees owe taxes in retirement, which can come as an unpleasant surprise if you aren't planning ahead for them.

Here's what you need to know about which taxes you can expect to pay in retirement and how to budget for them so they don't take an oversized bite out of your retirement income.

Taxes on Your Tax-Deferred Retirement Accounts

If you have been diligently saving for retirement via a tax-deferred retirement account like a 401(k), 403(b), 457 or IRA plan, then you probably already know that you will owe taxes in retirement on your distributions from these accounts. That's because the IRS incentivizes saving for retirement through these kinds of plans by allowing you to put pretax money into accounts where the funds grow tax-free until you're ready to take distributions.

At that point, you will owe regular income tax on your withdrawals from the tax-deferred accounts. You are allowed to make penalty-free withdrawals from the account once you've reached age 59.5 or held the account for at least 5 years, whichever milestone comes second.

But there's more to the taxation on these accounts. Specifically, the IRS requires retirees to withdraw money from the accounts, rather than hold onto those funds indefinitely. That's why the IRS requires every tax-deferred retirement account holder to begin taking required minimum distributions (RMDs), starting the year they turn age 72.

Your specific RMD is based on the total balance of your tax-deferred account as of December 31 of the prior year, and on your age. With that information, you can look up the IRS distribution table that tells you what number to divide your balance by based on your current age.

For instance, let's say you're 72 years old and your tax-deferred retirement account had a balance of $500,000 on December 31, 2021. The IRS distribution table gives a distribution period of 25.6 years for 72-year-old account holders, which means you would divide $500,000 by 25.6 to get $19,532, the minimum amount you would have to take out in 2022. ($500,000 / 25.6 = $19,531.25, rounded up to $19,532).

Your RMDs are treated as ordinary income, so you have to pay taxes on the amount you're required to withdraw. This could end up being a steep tax bill if you have large deferred-tax retirement account balances, so you'll need to plan ahead for the cost. For example, if you are in the 22% tax bracket and must take $19,532 as an RMD, then you will owe $4,297 in taxes on that withdrawal.

Taxes on Your Social Security Benefits

A common misconception about taxes in retirement is the belief that Social Security benefits are tax-free. While not all beneficiaries are required to pay taxes on their Social Security income, you may owe taxes on up to 50% or up to 85% of your benefits, depending on your total retirement income.

Taxation on your Social Security benefits is dependent on your "combined income," which is calculated by adding together the following:

• Half of your Social Security benefits
• All of your other income, including tax-exempt interest

The amount you come up with is compared to a lower and upper base amount. Single beneficiaries who have a combined income lower than $25,000 will owe no taxes on their Social Security benefits. Singles with an income above $25,000 and below $34,000 will owe taxes on up to 50% of their benefits. Single beneficiaries with an income greater than $34,000 will owe taxes on up to 85% of their benefits. For married couples filing jointly, the lower and upper base amounts are $32,000 and $44,000, respectively.

While the 50% and 85% taxable amounts may sound intimidating, it's important to remember that these percentages simply refer to the amount of your Social Security benefits that are taxable, not how much is deducted from your benefits to pay those taxes. Your benefits are taxed at your marginal tax rate. If you're in the 22% tax bracket and $8,500 of your Social Security retirement benefits are considered taxable, then you will owe $1,870 in taxes on your Social Security benefits. ($8,500 x 22% = $1,870).

Beware the Tax Torpedo

The fact that your Social Security retirement benefits may be taxable can cause additional tax issues if you are also taking money from tax-deferred retirement accounts like 401(k)s and IRAs. This problem is known as a tax torpedo, and it describes the additional tax burden that occurs when taking a distribution from your tax-deferred retirement account increases your combined income, making your Social Security benefits taxable.

For example, let's say you're in the 22% tax bracket and plan on taking $1,000 more from your tax-deferred retirement than you usually do. You might expect that this additional $1,000 distribution would mean you owe $220 in taxes, since that's 22% of $1,000. But taking that additional distribution increases your combined income by $1,000, which could make $850 of your Social Security benefits taxable if you are close to owing taxes on 85% of benefits.

If that is the case, you will owe $407 in taxes on your $1,000 distribution, since you will have to pay 22% taxes on both the $1,000 distribution and the $850 from your Social Security benefits. ($1,850 x 22% = $407).

The tax torpedo is most likely to affect taxpayers in the 10%, 12% and 22% tax brackets. Partnering with a CPA or other tax professional can help you navigate this particular tax issue so it doesn't torpedo your retirement goals.

Taxes and Tax-Exempt Investing

Managing taxes in retirement can be made simpler with savvy use of Roth IRAs and 401(k) plans. These plans are also tax-advantaged, but account holders deposit income they've already paid taxes on instead of deferring taxes on their contributions. Once the money is invested in the Roth account, it grows tax-free, and the account holder can access the money tax-free after reaching age 59.5 or holding the account for at least 5 years, whichever comes last.

In addition to providing you with tax-free retirement income, Roth account distributions are also excluded from the Social Security combined income calculation. This means you don't have to worry about your Social Security income becoming taxable when you take a distribution from your Roth account.

The IRS does allow taxpayers to convert funds from a traditional 401(k) or IRA to a Roth account, but you'll owe ordinary income tax on the amount you convert in the year of the conversion. If you're in a position to cover the cost of a conversion prior to retirement, converting your traditional 401(k) or IRA funds to a Roth account can be a good way to mitigate your future taxes in retirement.

The Bottom Line

Taxes in retirement are an inevitable part of your post-career budget. Understanding how and when Uncle Sam expects his cut can help you prepare for taxes and find ways to spread out the tax burden so you're not stuck paying your taxes all at once. Your retired self will be glad you planned ahead.