The average retiree has just $191,659 saved for retirement, according to a survey conducted by Clever. For many, that isn’t enough. But additional retirement income can have tax consequences that can catch you by surprise. It comes down to retirement tax strategies. To avoid sudden tax shocks, here's what you need to know.

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Common sources of retirement income

First, let’s examine common sources of retirement cash flow and the impact of each on your tax bill.

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Social Security

You can start your reduced Social Security benefit at age 62. To receive 100% of your benefit, you must wait until full retirement age. No matter how much you earn from other sources, 15% of your Social Security benefits are tax-exempt. But that still leaves 85% of your benefit that could be taxed if your income is over $25,000(or $32,000 if filing jointly).

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Pension

Pensions are a source of retirement income for many, but they aren’t as common as they once were. Pensions represent an additional source of unearned income, so you’ll owe taxes on the amount you receive.

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IRAs

The money you take out of your IRA in retirement also counts as income. You’ll pay income tax according to your tax rate in the year you withdraw it. Because it can increase your earnings and put you in a higher tax bracket, you must carefully weigh your retirement income sources before increasing your withdrawal amounts.

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401(k)s

The 401(k)withdrawals you make in retirement are also taxable income. Depending on your other earnings from Social Security, a pension, or IRA withdrawals, your withdrawals could push you into a higher tax bracket and increase the amount of your Medicare Part B Medical Insurance premiums.

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Strategies to level your tax bill

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Many older Americans consider bridging the financial gap in retirement by applying for Social Security before full retirement age, withdrawing more from their 401(k) or IRA, or even taking a part-time job.

However, you must first ask a crucial question — “How will that income affect my taxes?” Increasing your income could push you into the next tax bracket, and you might not realize it.

However, the goal may not be to pay the least tax possible. It’s more about “tax leveling” to avoid sudden jumps in your tax bill.

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Home equity can supplement your retirement cash flow

One of the best ways to increase retirement income is to use home equity. It can have a minimal impact on how much you pay in taxes, so there aren’t any surprises. You have a couple of options:

●     Sell your house outright and get a lump sum of money.

●     Borrow against your equity for a steady stream of income.

If you sell your house, you’ll face two consequences. First, you may have nowhere to live, which can be problematic. You could also face a large tax bill because of capital gains taxes you’ll owe from the proceeds from the sale of your home. In addition, the loan underwriting process can be challenging for retirees.

Borrowing against your equity is a much better option for most retirees. You can stay in your home without sacrificing your lifestyle.

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Using your home equity as a source of income, you can finance your retirement without increasing your tax bill. You could even use the income to delay when you file for SocialSecurity to qualify for a higher monthly benefit amount.

It’s important to be mindful of your retirement cash flow and tax planning. Don’t discount the benefit of home equity in supplementing your retirement income. It’s one of the most common sources of funds for retirement because it is usually the largest asset that most people own.

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