Many people assume retirement means a break from taxes. But in reality, taxes follow you into retirement—and they can look very different from your working years. Your income might come from a mix of Social Security, retirement accounts, pensions, and investments, each taxed in its own way.

If you’re not prepared, those taxes can chip away at your savings faster than expected. But with the right strategy, you can reduce your tax burden and keep more of your money working for you. Whether you’re close to retiring or planning ahead, understanding how retirement income is taxed is key to making informed financial decisions.

How Taxes Change in Retirement

Taxes don’t disappear when you stop working—but how you pay them does change. You may have less wage income, but a mix of retirement withdrawals, Social Security, and investment gains can still create a significant tax bill.

One big shift: you’re now responsible for managing your own tax payments. Unlike paychecks that have taxes automatically withheld, many retirement income sources do not. That means you may need to make quarterly estimated payments to the IRS.

Another change is that you might lose common deductions like mortgage interest or dependent tax credits. And if your retirement income is substantial, you could find yourself in a similar or even higher tax bracket than before.

Is Retirement Income Taxable?

Not all retirement income is taxed equally. Some income is fully taxable, some is partially taxed, and some may be tax-free, depending on how and when you access it. Here's a breakdown to help you understand which types of income could impact your tax bill in retirement.

Income That Is Generally Taxable

These sources usually trigger ordinary income tax and are important to monitor if you want to avoid surprise liabilities:

• Traditional IRA and 401(k) withdrawals – Taxed at your ordinary income rate.
• Pension payments – Most pensions are funded pre-tax and taxed fully when paid out.
• Interest income from savings and CDs – Reported annually as income.
• Non-qualified dividends – Taxed at your ordinary income rate.
• Short-term capital gains – Also taxed as ordinary income.
• Annuity earnings (in most cases) – Taxed based on how they were funded.

Income That May Be Tax-Free or Partially Taxable

These sources may reduce your tax burden, especially when used strategically:

• Roth IRA qualified withdrawals – Tax-free if conditions are met.
• Roth 401(k) qualified withdrawals – Same as above.
• Social Security benefits – Taxed up to 85% depending on income.
• Municipal bond interest – Typically exempt from federal taxes.
• Life insurance death benefits – Usually tax-free to beneficiaries.

Taxes by Retirement Income Source

Traditional IRAs and 401(k)s

Distributions from traditional retirement accounts are taxed as ordinary income. These accounts are often funded with pre-tax dollars, so every dollar you withdraw is subject to income tax. Once you turn 73, you must begin taking RMDs, regardless of whether you need the income. Failing to withdraw enough can result in a steep penalty—up to 25% of the RMD shortfall.

Tip: If you're in a lower tax bracket early in retirement, consider making partial withdrawals or Roth conversions before RMDs begin. This can help spread out your tax liability over time.

Roth IRAs and Roth 401(k)s

Withdrawals from Roth accounts are tax-free if you’re over 59½ and the account has been open for at least five years. These accounts are funded with after-tax dollars, so you've already paid taxes on contributions. Distributions don’t increase your taxable income or affect your Medicare premiums, making them a valuable asset for managing your overall tax profile in retirement.

Social Security Benefits

While some retirees think Social Security benefits are tax-free, many are surprised to learn that a portion can be taxed. Your "provisional income" determines how much of your benefits are subject to tax. This includes your adjusted gross income, any tax-free interest, and half of your Social Security benefits. Once your provisional income exceeds $25,000 (single) or $32,000 (married), up to 85% of your benefits may be taxed.

Visit SSA.gov for a detailed benefits calculator.

Annuities

Annuities are taxed based on how they were purchased. If you bought an annuity with pre-tax dollars, such as from a traditional IRA or 401(k), the entire payout is taxable as ordinary income. If funded with after-tax dollars, only the earnings portion is taxed. The IRS uses an "exclusion ratio" to determine what percentage of each payment is taxable. Keep in mind that annuity taxation can be complex, especially with variable or indexed annuities.

Pensions

Most pensions are funded with pre-tax dollars, making the payments fully taxable as ordinary income when received. Some state and municipal pensions may be partially or fully exempt from state income taxes, depending on where you live. Be sure to understand both federal and state tax treatment when estimating your future pension income.

Investment Income

Even in retirement, capital gains and investment income can create tax liability. How they’re taxed depends on the type of investment and how long you hold it:

• Long-term capital gains (held over a year) are taxed at 0%, 15%, or 20%, depending on your income.
• Qualified dividends are also taxed at these favorable long-term rates.
• Short-term gains and non-qualified dividends are taxed as ordinary income.
• Interest from savings accounts, CDs, and bonds is fully taxable.

If your modified adjusted gross income exceeds certain thresholds ($200,000 for singles or $250,000 for joint filers), the 3.8% Net Investment Income Tax (NIIT) may apply to interest, dividends, capital gains, and rental income.

Life Insurance Cash Values

Permanent life insurance policies build cash value over time. You can withdraw up to your total contributions (cost basis) tax-free. After that, additional withdrawals or loans against the policy are generally tax-free too—as long as the policy remains in force. However, if the policy lapses with an outstanding loan balance, the IRS may treat that as taxable income.

Home Sales

If you decide to sell your home in retirement, the IRS allows you to exclude up to $250,000 in capital gains ($500,000 for married couples) from your income if you meet the ownership and residency tests. This can be a valuable tool if you downsize or relocate in retirement, but be mindful of reporting requirements and capital improvements that may affect your gain.

Source: IRS Publication 523

Managing Retirement Taxes

Develop a Smart Withdrawal Plan

A thoughtful withdrawal strategy can reduce your tax burden and help your savings last longer. The general order many financial advisors suggest is:

• Taxable accounts – Start with brokerage accounts or savings where capital gains are taxed more favorably.
• Tax-deferred accounts – Then begin withdrawing from traditional IRAs and 401(k)s.
• Roth accounts – Save these for later years to avoid increasing your taxable income.

This approach allows retirees to fill lower tax brackets with taxable and tax-deferred income, while preserving tax-free Roth funds for the future.

Consider Roth Conversions

Roth conversions involve transferring money from a traditional IRA or 401(k) to a Roth IRA, paying taxes now to enjoy tax-free growth later. This can be particularly helpful in years when your income is temporarily lower, such as right after retirement but before Social Security and RMDs begin. Be mindful not to convert so much that it bumps you into a higher tax bracket or triggers Medicare surcharges.

Watch Your Medicare Premiums

Higher income in retirement can mean higher Medicare premiums due to Income-Related Monthly Adjustment Amounts (IRMAA). These surcharges apply to Part B and Part D premiums and are based on your income from two years prior. Staying below income thresholds can save hundreds or even thousands per year. Coordinating withdrawals and conversions with these thresholds in mind is crucial.

Harvest Gains and Losses

Tax-loss harvesting means selling investments at a loss to offset gains and reduce your taxable income. This can be especially helpful if you’ve had a strong year in the market or need to rebalance your portfolio. Retirees can also use gain harvesting to lock in 0% capital gains in low-income years.

State Taxes on Retirement Income

Where you retire can have a major impact on your after-tax income. Some states are more tax-friendly than others, offering full or partial exemptions on Social Security, pensions, or IRA withdrawals.

States that don’t tax retirement income include Florida, Texas, Alaska, and Nevada. These states offer retirees significant savings by eliminating state income tax altogether.

States that do tax retirement income include California, Vermont, Minnesota, and others that tax some or all types of retirement income. However, even within these states, exemptions or deductions may apply.

Use this Kiplinger retirement tax map to compare state-by-state policies and explore the best fit for your retirement goals.

When to Get Help From a Tax Professional

If you have a variety of income sources, are considering Roth conversions, or plan to relocate to a different state, the tax implications can quickly become complex. A CPA or retirement-focused tax advisor can:

• Help you estimate annual and long-term tax liabilities
• Recommend personalized withdrawal strategies
• Ensure you meet quarterly payment and RMD requirements
• Avoid triggering Medicare IRMAA surcharges

Financial planners at Retirable can also integrate tax planning into your full retirement strategy, giving you peace of mind that your money is working efficiently.

FAQs: Taxes in Retirement

Is Social Security taxed in retirement?

Yes, Social Security benefits can be taxable depending on your "provisional income," which includes your adjusted gross income, tax-exempt interest, and half of your Social Security benefits. If you’re a single filer with provisional income above $25,000 or a joint filer above $32,000, up to 50% to 85% of your benefits may be subject to federal income tax. However, some states do not tax Social Security at all, so your total tax impact depends on where you live and how much additional income you receive.

How can I lower my tax bill in retirement?

To reduce your tax liability in retirement, consider strategies like delaying Social Security to reduce provisional income, drawing first from taxable accounts to manage your bracket, and converting traditional IRA funds to Roth IRAs in low-income years. You can also harvest capital losses, take advantage of the standard deduction for seniors, and stay under income thresholds that trigger Medicare surcharges or higher tax brackets. Working with a tax advisor can help tailor these strategies to your financial goals.

Do I have to pay taxes on my 401(k)?

Yes, traditional 401(k) contributions are made pre-tax, which means that all withdrawals are taxed as ordinary income. Once you reach age 73, you must begin taking required minimum distributions (RMDs), even if you don’t need the money. These withdrawals can significantly increase your taxable income in retirement, potentially pushing you into a higher bracket or affecting your Medicare premiums. Planning ahead with Roth conversions or early withdrawals in lower-income years may help you minimize the tax hit.

Are Roth IRA withdrawals tax-free?

Withdrawals from Roth IRAs are generally tax-free if you're at least 59½ and the account has been open for five years or more. This makes them a valuable tool in retirement tax planning, as they don’t count toward your taxable income or provisional income for Social Security. Using Roth funds strategically can help you stay under key income thresholds and avoid RMDs entirely, since Roth IRAs are not subject to mandatory distributions during the original account holder’s lifetime.

Which states are best for retirees, tax-wise?

States like Florida, Wyoming, Alaska, and Tennessee are considered highly tax-friendly for retirees because they have no state income tax and don’t tax retirement income, including Social Security. Other states, such as Pennsylvania and Mississippi, may tax wages but offer generous exclusions for retirement income like pensions or IRAs. On the other hand, states like California and Vermont fully tax most forms of retirement income. Evaluating state income tax policies, along with property and sales taxes, can help you choose a more retirement-friendly location.