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What Taxes to Expect When You Retire — And How to Avoid Them
Retirement means leaving many things behind. Unfortunately, taxes aren’t one of them.
Taxes in retirement can be complicated. You might be drawing income from multiple sources, including 401(k) distributions, Social Security, interest from a savings account, a pension or even a part-time job.
When tax time rolls around, figuring out how much you owe can be a headache.
Here’s a rundown of some taxes to expect in retirement. We’ll also discuss ways to reduce those taxes, along with free tax prep programs for seniors.
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Not everyone is taxed on their Social Security benefits.
You won’t owe taxes on Social Security if it’s your only source of retirement income. Also, Supplemental Security Income (SSI) payments are never taxable.
The amount of tax you may owe depends on other retirement income you receive.
To figure out if you owe taxes on your benefits, the Social Security Administration considers what’s known as your “combined income.”
Here’s how it works.
Retirees must pay taxes on their Social Security benefits if:
The Internal Revenue Service won’t tax your entire Social Security income, even if you exceed those combined income thresholds. Instead:
50% of your Social Security benefits are taxable if:
85% of your Social Security benefits are taxable if:
Only about 40% of people who receive Social Security have to pay federal income taxes on their benefits, according to the Social Security Administration.
While 50% or 85% of your Social Security benefits may be taxable, they will be taxed at your ordinary income rate. Here’s a table of the 2023–24 tax brackets for reference.
Withdrawals from qualified retirement accounts may also be taxable.
Whether you owe taxes depends on if you funded the account with pre-tax dollars (a traditional account) or post-tax dollars (a Roth account).
You’ll face taxes on withdrawals from traditional retirement accounts. This can include traditional 401(k)s, IRAs, SEP IRAs, Simple IRAs and 403(b)s.
Contributions to traditional retirement accounts reduce your taxable income in the year they’re made. But your taxes come due when you start withdrawing money in retirement.
Distributions from a traditional 401(k) plan or other qualified retirement accounts are taxed at your ordinary income rate. This ranges from 10% to 37%, depending on your tax bracket.
Distributions from Roth accounts — including a Roth IRA and Roth 401(k) — generally aren’t taxable, which can make these accounts a great source of tax-free income in retirement.
There are a couple tax rules to keep in mind about Roth accounts.
Withdrawing money from a Roth account when your taxable income is higher is a good way to save money on taxes.
For example, if you plan on working a part-time job the first year after you retire, withdrawing money from a Roth IRA can minimize your tax bite. Once you’re no longer earning income, you can tap your traditional retirement accounts.
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It might be tempting to leave money in your traditional accounts as long as possible so you can avoid taxes in retirement.
But you can’t leave money in your 401(k) forever. Uncle Sam eventually wants his cut.
A required minimum distribution (RMD) is the amount of money you are required to withdraw from your retirement account each year after you turn 72.
If you don’t withdraw the money, you’ll owe big bucks. Failing to take required minimum distributions — or not withdrawing enough — can result in a 50% tax on the amount you didn’t take.
How much you’re required to withdraw changes from year to year and is based on IRS life expectancy tables.
Use this RMD calculator from the U.S. Securities and Exchange Commission to figure out how much you need to withdraw.
A quick note: A Roth IRA isn’t subject to required minimum distributions while you’re alive, though when you die, your account beneficiary may have to take RMDs.
Here’s how other common sources of retirement income are taxed.
Tax treatment for an annuity depends on how you purchased the contract.
If you bought an annuity inside a 401(k) or traditional IRA, the entire payment you receive is considered taxable income. It’s taxed as ordinary income, which is based on your tax bracket.
It’s a little different for annuities purchased outside retirement accounts with after-tax dollars. In that case, the portion of the payment that represents the principal (your original investment) is tax-free. The rest is taxed at your ordinary income rate.
For example, if you purchased an annuity for $100,000, and in 20 years it’s worth $180,000, the $80,000 is taxable.
You’ll owe federal income tax on payments you receive from a pension. Pension payments are taxed at your ordinary income rate.
Your employer will withhold taxes as the payments are made, so at least some of what’s due will already be paid, according to the Financial Industry Regulatory Authority.
You may also owe state tax on some or all of your pension income. Several states don’t tax payments from pensions at all, including Florida, Illinois, Pennsylvania and Nevada.
The interest you earn on savings accounts, certificates of deposit (CDs) and money market accounts is considered taxable income by the IRS.
Interest earned from these accounts is taxed at your marginal tax rate, also known as your ordinary income tax rate. This can range from 10% to 37%, depending on your tax bracket.
If you earned $10 or more in interest income last year, you’ll receive tax form 1099-INT from your bank or credit union before Jan. 31.
Investments sold inside a taxable brokerage account — i.e. not a qualified retirement account — are subject to capital gains tax.
How much you owe in taxes depends on how long you owned the asset before you sold it.
Tax Year 2024 Long-Term Capital Gains Tax Rates
Hold investments inside a taxable brokerage account for at least a year if you want to reduce taxes in retirement. If your income is low enough (less than $47,025 for tax year 2024 single filer), you might be able to avoid capital gains taxes on long-term investments entirely.
Taking losses in a taxable brokerage account is another way to minimize taxes.
When you sell a stock or other asset for less than what you paid for it, you experience a capital loss. You can use capital losses to offset capital gains.
If you made a big profit earlier in the year, for example, selling stocks at a loss can reduce or even eliminate how much you owe in capital gains taxes.
Seniors who take the standard deduction enjoy an additional break when it comes to taxes in retirement.
People who are 65 and older — or people who are blind of any age — get a higher standard deduction. This can help reduce how much you owe at tax time.
For reference, the standard deduction for tax year 2024 is $14,600 for single filers and $29,200 for married couples.
Married couples who are age 65 or older can each receive a $1,500+ bump to the standard deduction for tax year 2024 (which are filed in 2025).
Single filers over 65 can enjoy a $3,900 increase to the standard deduction.
Increased Standard Deduction for People 65 and Older
You can receive an additional deduction if you’re blind or have low vision that’s below 20/200 and not correctable with glasses. Your spouse can also enjoy a higher standard deduction.
This page from the IRS explains how to qualify for that deduction.
As you can see, taxes in retirement can get complicated.
Thankfully, the IRS and AARP Foundation offer free tax help for seniors at no cost to you.
Speaking with a financial advisor or tax professional is the best way to minimize taxes after you retire. A financial expert can help you navigate state and local taxes, as well as federal income taxes. They can also help you anticipate future tax bills so you can plan your finances in retirement accordingly.
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Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. She focuses on retirement, investing, taxes and life insurance.
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