Originally published July 2022. Updated October 2026.
Do you know how much you will pay in taxes on retirement income?
Retirement may end your paycheck, but it doesn’t end your tax bill. How much tax you pay depends in part on where your retirement income comes from and the tax characteristics of each income source.
From a tax-planning perspective, holding savings across different account types can give you more flexibility in retirement. Your tax bill in retirement may look very different from someone else’s. It depends on your income, spending needs, account types, and where your retirement cash flow comes from.
Building retirement savings is only part of the challenge. What matters in retirement is not only how much you have saved, but also how much of those savings you can spend after taxes.
Taxes on Retirement Income: Key Points
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How Common Sources of Retirement Cash Flow Are Taxed
| Source | General federal tax treatment |
| Traditional IRA/401(k)/403(b) withdrawals | Taxable portion generally taxed as ordinary income |
| Pension | Generally ordinary income, except for any return of after-tax contributions |
| Taxable brokerage account | Interest, dividends, and realized gains may be taxed differently. |
| Social Security | Up to 85% of benefits may be included in taxable income. |
| Qualified Roth distributions | Generally tax-free. |
| Qualified HSA distributions | Tax-free when used for qualified medical expenses. |
| Municipal-bond interest | Generally exempt from federal income tax when held in a taxable account. |
| Qualified charitable distribution | Qualifying IRA distribution generally excluded from taxable income. |
| Main-home sale | Some gain may qualify for the $250,000/$500,000 exclusion. |
Planning for Taxes on Retirement Income
Start by identifying the income sources you expect to rely on in retirement. For many retirees, income comes primarily from personal savings and investments, as well as Social Security benefits. Other sources may include a pension, part-time work, consulting income, or other earnings.
Examples of personal savings and investments include individual retirement accounts (IRAs or Roth IRAs), employer-sponsored retirement plans (401(k)s or 403(b)s), savings accounts, and taxable brokerage accounts. Brokerage accounts include assets such as stocks, bonds, and mutual funds.
The type of account matters, but so can the investments you hold in each account. This concept, known as asset location for tax efficiency, considers which investments may fit best in taxable, tax-deferred, and tax-free accounts.
The IRS doesn’t make things easy. Different tax rules apply to different sources of retirement income. That makes planning important. Tax planning can help you manage your lifetime tax bill. Keep in mind that this isn’t a one-size-fits-all topic. The best solution depends on your specific circumstances. Often the best approach combines several strategies to improve your after-tax retirement income over time.
2026 Planning Note: Enhanced Deduction for Taxpayers Age 65 and Older
For tax years 2025 through 2028, taxpayers age 65 or older may qualify for an enhanced deduction of up to $6,000 per eligible person. The deduction begins to phase out when modified adjusted gross income exceeds $75,000 for an individual or $150,000 for a married couple filing jointly. Married taxpayers must file jointly to claim the deduction.
Taxable Income in Retirement
This discussion focuses on common sources of retirement income, primarily federal income taxes. State taxation of retirement income varies, so where you live can also affect your tax bill. This article does not cover products such as annuities or permanent life insurance.
Traditional Retirement Accounts
While working, we contribute to retirement plans such as traditional 401(k)s, 403(b)s, traditional IRAs, and SEP IRAs. Employees generally fund traditional employer retirement plans with pre-tax contributions. Contributions to a traditional IRA may be deductible, depending on your circumstances. In either case, investment earnings generally grow tax-deferred. Amounts not previously taxed, along with tax-deferred investment earnings, are generally taxable when withdrawn. Withdrawals before age 59 ½ may also be subject to a 10% additional tax, unless an exception applies. In general, ordinary income tax rates apply to the taxable portion of a withdrawal.
Traditional retirement accounts can also create taxable income later in retirement through required minimum distributions, or RMDs. RMD timing depends on the account type and your circumstances. Traditional IRAs generally require distributions once you reach the applicable RMD age, while some workplace-plan participants may be able to delay RMDs until retirement.
One exception to the usual tax treatment of traditional IRA withdrawals involves qualified charitable distributions, or QCDs. If you are age 70½ or older, you can generally direct a distribution from an eligible IRA directly to an eligible charity without including the qualifying amount in taxable income. A QCD can also count toward your required minimum distribution if you are subject to RMDs. You cannot also claim a charitable deduction for the amount excluded from income.
Pensions
Most pension payments are taxable as ordinary income if you did not make after-tax contributions to the plan. If you made after-tax contributions, part of each payment may represent a tax-free return of those contributions.
Some pension plans offer a lump-sum distribution instead. If you take a taxable lump-sum distribution rather than rolling it over, you generally include the taxable portion in your income for that year. That tax will be payable in the year in which you receive the payment. The related income could push you into a higher tax bracket. A direct rollover to a traditional IRA or other eligible retirement plan generally allows you to continue deferring income tax until you later withdraw the funds.
Taxable Brokerage Accounts
A taxable brokerage account can generate several types of income, including interest, dividends, capital-gain distributions, and gains when you sell investments for more than your tax basis. If you sell an asset after holding it for more than one year, any resulting capital gain is generally considered long-term.
Long-term capital gains and qualified dividends generally receive preferential federal tax rates. For 2026, the 0% long-term capital gains rate generally applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. Because long-term capital gains sit on top of your other taxable income when applying these brackets, your other income can affect how much of a gain falls into each rate. Income above those thresholds may push some long-term gains into the 15% or 20% brackets. Higher ordinary income-tax rates generally apply to short-term capital gains.
Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax on certain investment income.
Partially Taxable Income in Retirement
Social Security
Anywhere from 0% to 85% of your Social Security benefits may be taxable. That does not mean you pay an 85% tax rate. It means up to 85% of your benefit may be taxable. Your other income helps determine how much of your Social Security benefit becomes taxable. If Social Security benefits represent your only source of income, you generally won’t pay taxes on the benefits you receive.
To determine whether your benefits may be taxable, add one-half of your Social Security benefits to your other income, including tax-exempt interest. This amount is commonly called combined or provisional income. If that amount does not exceed $25,000 for a single filer, or $32,000 for a married couple filing jointly, Social Security benefits generally are not federally taxable. Unlike many other tax-related thresholds, the IRS has not indexed these amounts for inflation.
This interaction can create what is sometimes called the Social Security tax torpedo. As other income rises, additional Social Security benefits can become taxable at the same time, temporarily increasing your effective marginal tax rate.
As of 2026, 42 states and Washington, D.C. do not tax Social Security benefits. Eight states tax benefits for at least some residents, although their exemptions and income limits may vary. In 2026, the eight are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.
Potentially Tax-Free Sources of Retirement Cash Flow
Health Savings Accounts (HSAs)
As discussed in more detail here, HSAs can provide three federal tax advantages. Eligible HSA contributions can be deductible or excluded from federal taxable income. Investment earnings can grow tax-free at the federal level, and distributions used for qualified medical expenses can also be tax-free. Unlike a flexible spending account (FSA), HSA funds can carry over from one year to the next.
In 2026, individuals can contribute up to $4,400 to an HSA ($8,750 for families). Those who are 55 or older can contribute an additional $1,000. If both spouses are eligible and age 55 or older, each can make a $1,000 catch-up contribution. Each spouse must make their catch-up contribution to an HSA in their own name.
Once enrolled in Medicare, an individual generally can no longer contribute to an HSA. You can still use existing HSA funds after enrolling in Medicare.
Roth IRAs and Roth Workplace Plan Withdrawals
From a taxes on retirement income perspective, Roth IRAs are the opposite of traditional IRAs. You contribute after-tax dollars to a Roth IRA. Qualified Roth IRA distributions are tax-free. Generally, a distribution is qualified once you meet the five-year requirement and are at least age 59½, disabled, or meet another qualifying condition.
Keep in mind that you can generally withdraw Roth IRA contributions at any time without income tax or the 10% additional tax because you already paid tax on those dollars.
Different rules apply to earnings. A nonqualified Roth IRA distribution may make earnings taxable and potentially subject to the 10% additional tax. Roth IRA ordering rules and the applicable exceptions determine the result.
Qualified distributions from designated Roth accounts in 401(k), 403(b), and governmental 457(b) plans are also generally tax-free. Unlike Roth IRA contributions, designated Roth contributions to workplace plans are not subject to Roth IRA income limits. The plan must offer a Roth option. Under current law, designated Roth accounts in workplace plans are not subject to lifetime RMDs for the original account owner.
Municipal Bonds
When you hold bonds in a taxable account, interest from most taxable bonds is subject to federal income tax. Municipal-bond interest, however, is generally exempt from federal income tax. These tax benefits generally matter when you hold municipal bonds in taxable accounts. Holding a municipal bond inside a traditional IRA does not make a later IRA withdrawal tax-free.
If you own municipal bonds issued by your state of residence, the interest may be exempt from state and local taxes. For example, Maryland residents generally do not pay Maryland income tax on interest from qualifying Maryland municipal bonds.
Tax-exempt does not always mean tax-irrelevant. Municipal-bond interest can still enter into calculations such as the taxation of Social Security benefits.
Gain from the Sale of Your Home
The IRS provides a significant benefit to homeowners. You may be able to exclude some or all of your gain from tax. If you meet the requirements, you may exclude up to $250,000 of the gain from the sale of your primary residence, or up to $500,000 if you are married and filing jointly. If your gain exceeds the applicable exclusion, only the remaining gain may be taxable.
Generally, you must meet both an ownership test and a use test, which require you to have owned the home and lived in it as your primary residence for at least two of the five years before the sale to qualify for the exclusion. A surviving spouse may still qualify for the $500,000 exclusion if she sells the home within two years of her spouse’s death, has not remarried before the sale, and meets the other requirements.
CLOSING THOUGHTS
Retirement does not create an entirely new set of tax rules. What changes is where your income comes from and how you turn your savings into cash flow. Instead of primarily adding to retirement accounts, you begin deciding which accounts to draw from and when.
Retirement does not automatically mean a lower tax bill. Any taxes you do pay reduce your available income. Thoughtful planning can help you manage your tax bill and preserve more of your retirement income for the things that matter to you.
Tax diversification can help. Holding savings across taxable, tax-deferred, and Roth accounts may give you more flexibility over where retirement cash flow comes from. Just as important is deciding which accounts to draw from and when. The goal is not simply to minimize this year’s tax bill. It is to make tax-aware decisions that support your spending needs and broader financial plan over time.
If you would like help coordinating your retirement income, investments, and taxes, schedule a Discovery Call.
Related Reading:
- How to Pay Taxes in Retirement Without Making It Harder Than It Needs to Be.
- When a Roth Conversion Helps. And When It Doesn’t.
- The Social Security Tax Torpedo: Could It Happen to You?
- Tax-Efficient Investing: Why Good Returns Can Still Cost You.
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Phil Weiss founded Apprise Wealth Management, where he works with women facing new beginnings. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25 years, he has worked extensively in the areas of personal finance and investment management. Phil is a CFA charterholder, a CPA, and an RLP®.
