a red background" width="" />It's important to know how common sources of retirement income are taxed at the federal and state levels.
When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works.
a red background" width="" />
Navigating taxes in retirement can be challenging. Your tax situation may differ from your working years due to income and tax bracket changes. Required withdrawals from retirement accounts and income from other sources can also affect your tax liabilities.
That’s why it's crucial to know how common sources of retirement income are taxed. Having this information can help you develop a tax-efficient strategy for your retirement years.
Be a smarter, better informed investor.
Save up to 74%
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Comprehensive retirement planning involves considering various sources of income and understanding how they are taxed at the federal and state levels. But thankfully, there are several types of income the IRS doesn't tax. For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn't subject to tax at the state level.
Still, your tax planning should consider the tax treatment of income from annuities, pensions, Social Security benefits, and retirement savings accounts. You will also want to assess tax liability from various investments, earnings, and proceeds.
Here's a breakdown of some common retirement income sources and a brief description of their federal tax implications. (More below on state taxes on retirement income.)
Social Security Benefits: Depending on provisional income, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates.
Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions.
Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.
Sales of Stocks, Bonds, and Mutual Funds: Long-term gains (held over a year) are taxed at 0%, 15%, or 20% capital gains tax rates, based on income thresholds. Net investment income tax (NIIT) factors in for some taxpayers. at a rate of 3.8%.
Dividends: Qualified dividends are taxed at long-term capital gains rates; non-qualified dividends are taxed as ordinary income based on your federal tax bracket.
Traditional IRAs and 401(k)s: Contributions to traditional IRAs and 401(k)s reduce your taxable income. However, withdrawals are taxed at ordinary income rates. Required minimum distributions (RMDs) start at age 73. Withdrawals before age 59 ½ are subject to a tax penalty.
Roth IRAs and Roth 401(k)s: Contributions to Roth accounts are not tax-deductible. However, withdrawals after five years following the first contribution are tax-free for Roth IRAs, including gains. Withdrawals before age 59 ½ are subject to a tax penalty.
Life Insurance Proceeds: Life insurance proceeds are generally not subject to tax when received as a beneficiary. However, surrendering a policy for cash may have tax implications.
Savings Bonds: Bond interest is generally taxable at ordinary income rates upon maturity or redemption but may be tax-free for education expenses if certain conditions are met.
Annuities: For annuities, the portion representing the principal is tax-free; earnings are taxed at ordinary income rates unless purchased with pre-tax funds.
Home Sales: Under the Section 121 home sale exclusion, primary home sale gains up to $250,000 ($500,000 for married couples) are excluded from income tax if specific ownership and use criteria are met.
Crafting a tax-efficient retirement strategy requires careful consideration of various income sources and their tax implications.
Also, note that while this article focuses on federal taxes on different types of retirement income, it is essential to consider the impact of state and local taxes on your finances. (There are more than a dozen states that don't tax retirement income.)
To learn more about how all 50 states and the District of Columbia tax retirement, see Kiplinger’s report on Taxes in Retirement.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
By submitting your information you agree to the Terms & Conditions and Privacy Policy and are aged 16 or over.
Senior Tax Editor, Kiplinger.comAs the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
Three out of Four Retirees Say They’re OK Financially: Will You Be One of Them? In a snapshot survey of views on retirement in the U.S., three in four retirees say they have enough money to live comfortably. Will you be able to say the same? By Charlotte Gorbold Published 10 September 24
10 Bond Investments to Consider Before the Fed Cuts Rates Why these picks for your bond portfolio are poised to help you get the biggest return in market conditions. By Nellie S. Huang Published 10 September 24
Five December 31 Tax Deadlines for Retirees The end of the year will be here before you know it, so it might be a good idea to start thinking soon about what you need to do for taxes before it arrives. By Evan T. Beach, CFP®, AWMA® Published 10 September 24
IRS Has No Set Plan to Replace Old Tech IRS What could old IRS technology mean for your federal tax return and cybersecurity? By Kate Schubel Published 9 September 24
What Time is the Mega Millions Drawing? Lottery Tax With a high-stakes lottery jackpot, the payout (less some tax) is anyone’s to win. By Kate Schubel Last updated 7 September 24
IRS Back Taxes Scam Call Steals Millions Scams IRS fakes are cheating thousands of people out of “overdue tax debt.” Are you next? By Kate Schubel Last updated 3 September 24
Unrealized Gains Tax: One Important Thing to Know Now Capital Gains Unrealized capital gains have taken center stage in election discussions about tax fairness and economic policy. By Kelley R. Taylor Last updated 3 September 24
IRS: How to Get a 401(k) Match for Your Student Loan Payment Savings Those with 401(k), 403(b), and other savings plans might get relief through their employer-provided retirement account. By Kate Schubel Published 26 August 24
Kamala Harris Golf Tax and Unrealized Gains? What You Really Need to Know Election 2024 There's a lot of social media talk about capital gains taxes and a golf tax. How much is real? By Kelley R. Taylor Last updated 27 August 24
How Much Is the Child Tax Credit for 2024? Tax Credits The refundable amount of this tax break is slightly higher for the 2025 tax filing season. Here’s what you need to know. By Gabriella Cruz-Martínez Last updated 25 August 24
Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
© Future US, Inc. Full 7th Floor, 130 West 42nd Street, New York, NY 10036.
