Key Takeaways:
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Many types of retirement income are taxable at the federal level, particularly withdrawals from traditional 401(k)s and traditional IRAs, but taxability depends on the source and your total income.
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Social Security may be partially taxable on your federal return, and some states tax it too, so your total obligation can vary by location.
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13 states are considered retirement-income-friendly because they don’t tax retirement income: Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Retirement income can be taxable, but not all retirement funds receive the same treatment. Some income is taxed when it’s deposited, and other income is taxed when it’s withdrawn. Federal regulations apply no matter where you live.
State regulations are a factor, too, and the state you live in during retirement can increase your taxes, lower them, or eliminate them altogether. In this guide, you’ll learn about the common income types, how state taxes can affect your take-home amount, and how American Hartford Gold can add value to your retirement portfolio.
How Do Federal Taxes Work for Retirees?
Federal income tax depends on two main things: what type of retirement income you receive and what your total household income is for the year. The IRS doesn’t treat all retirement sources of income the same. Traditional retirement accounts are normally taxed when you withdraw. Roth accounts can be tax-free if you meet certain conditions.
Social Security may be partially taxable depending on your combined income. Your filing status is also important since tax brackets and standard deductions vary depending on whether the filer is single or a married couple filing jointly. Deductions and credits can reduce your taxable income, but retirees often see changes after they stop working.
For example, you’ll no longer be subject to certain work-related deductions. Retirement can also introduce new events, like required minimum distributions (RMDs), which typically start at age 73. Federal tax treatment often surprises new retirees because retirement income can come from various sources.
A couple may have Social Security, a pension, and IRA withdrawals in the same year. Each source has its own set of rules, but the IRS looks at the combined total to determine taxes.
Ordinary Income vs. Tax-Free Income
Many types of retirement funds are taxed like ordinary income. This includes most withdrawals from traditional 401(k)s, traditional IRAs, and pensions. So a “tax-deferred” account doesn’t mean “tax-free.” It means the tax is delayed until withdrawal. Other retirement income may be tax-free, at least at the federal level, if you meet the conditions.
Qualified Roth IRA withdrawals can be tax-free as well. Some portions of Social Security can be exempt from tax, too, depending on your combined income. If you have post-tax contributions in a workplace plan, those contribution dollars can come out tax-free, while the earnings portion is taxed.
Is Social Security Taxable?
Social Security is not automatically tax-free. Whether you owe federal tax on it depends on your combined income. Combined income typically includes your adjusted gross income, certain nontaxable interest, plus half of your Social Security benefits. If your combined income falls below the set thresholds, you may be exempt from federal tax on Social Security income.
If it’s above those thresholds, you may owe tax on a portion of your benefits. No individual will pay tax on 100% of Social Security benefits under the current rules. Instead, up to 50% or 85% of benefits may be included in taxable income, depending on the combined income.
A retiree can have taxes that vary from one year to the next, even if Social Security didn’t change much. A higher IRA withdrawal, for example, can push you into a higher tax bracket.
Additionally, when more of your Social Security benefit becomes taxable, your taxable income increases, which raises your overall tax bill.
Which Factors Affect the Taxability of Social Security?
The most common reason Social Security becomes taxable is additional income from other sources. Withdrawals from traditional retirement accounts count as income and can push combined income into a higher tax bracket. Wages from part-time work count as well. Interest, dividends, and capital gains in taxable accounts can also add to combined income.
Even one-time financial events can affect taxability. Selling a property or taking a larger withdrawal to fund a home project can increase your combined income for that year. That can cause more of your Social Security to become taxable. To avoid being surprised by taxes, estimate the year’s total income ahead of time, then adjust withholding or monthly withdrawals if needed to avoid shifting into a higher bracket.
What To Know About Traditional 401(k) and IRA Withdrawals
Most withdrawals from traditional 401(k)s and traditional IRAs are taxed like ordinary income at the federal level. These account types typically contain pre-tax contributions and tax-deferred growth, which is why they helped lower taxes while you were working. The trade-off is that withdrawals are taxable during retirement.
If you take any distributions before age 59½, you may also face a 10% additional tax unless an exception applies. Many retirees use these accounts to create their monthly retirement paycheck. When using this approach, it’s important to plan for taxes. Your gross withdrawal amount isn’t the same as the amount you get to spend if you owe federal and state taxes.
Required minimum distributions (RMDs) also apply to most traditional accounts later in life. Under current law, retirees typically begin taking RMDs at age 73. You must withdraw at least the required amount each year to avoid penalties. RMDs can affect the tax obligations of retirees who don’t necessarily need the money because they’re covered by other sources.
The RMD still counts as taxable income even if it’s moved into a savings account. This can affect how much of your Social Security income is taxable and may affect other income-based calculations as well.
Roth Accounts and After-Tax Contributions
Roth accounts can reduce the tax impact of retirement withdrawals when the conditions are met. Qualified Roth IRA withdrawals are normally tax-free, which can help cover expenses without increasing taxable income. Roth 401(k) withdrawals can also be tax-free when conditions are met, and the law removed RMDs for Roth 401(k) accounts (as of 2024).
Roth IRAs don’t have RMDs during the original owner’s lifetime under current rules. Post-tax contributions in a 401(k) are another important category. If you contributed after-tax funds, those contributions won’t be taxed again when you withdraw them.
However, the earnings tied to those contributions are taxable. Plan administrators and IRA custodians track these amounts, and the tax forms you receive will help you see what is taxable and what isn’t.
Pensions, Annuities, and Other Retirement Income
Pensions are typically taxable at the federal level like regular income. If your pension comes from employer contributions and pre-tax employee contributions, your monthly pension check is usually taxable. If you put post-tax money into a pension plan, part of each payment you receive may be considered a return of that money.
That portion isn’t taxed until you’ve received back the full amount you originally contributed after tax. Annuities can be taxable as well, but their tax treatment depends on how the annuity was funded. An annuity purchased with pre-tax retirement dollars is normally taxed like regular income when paid out.
An annuity purchased with post-tax dollars may have a portion of each payment treated as non-taxable return of principal (a distribution that repays your original spend) and a portion taxed as earnings. Since annuities vary widely, it’s important to study tax reporting forms closely.
Retirement-related income can also include part-time wages, rental income, or taxable interest and dividends. The IRS looks at your total income when determining tax brackets and Social Security taxability. A retiree who works part-time might have more taxable income than expected, even if retirement account withdrawals are modest.
Which States Don’t Tax Retirement Income?
State taxes are where retirees see the biggest differences, depending on location. There are 13 states that exempt retirement income from tax. Of the 13, there are nine states with no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
The remaining four states have income tax but exempt the most common types of retirement income: Illinois, Iowa, Mississippi, and Pennsylvania. In these states, many retirees pay no state income tax on Social Security, pensions, and standard withdrawals from IRAs or 401(k)s. Tax exemption eligibility can vary depending on age, distribution type, or how the income is categorized.
Grow Your Retirement Fund With AHG
Retirement income can be taxable, but tax obligations vary depending on factors like the type of distribution and the state you live in. If you want to grow your retirement income further for additional security, consider diversifying your holdings with precious metals like gold or silver.
With American Hartford Gold, clients can tie their retirement savings to physical gold with a Gold IRA to protect the value of their savings. Expand your assets and create a more stable future.
FAQs
Is Social Security retirement income taxable?
It can be. The federal government may tax a portion of Social Security benefits based on your combined income. Some states don’t tax Social Security or other common types of retirement income at all.
Are 401(k) withdrawals taxed the same way as IRA withdrawals?
Traditional 401(k) and traditional IRA withdrawals are typically taxed like ordinary income at the federal level. Roth withdrawals can be tax-free when certain conditions are met, whether they come from a Roth 401(k) or a Roth IRA. Early withdrawals may trigger additional taxes unless an exception applies.
Which states don’t tax retirement income?
13 states are known for not taxing retirement income: Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
Sources:
Deductions in retirement | Department of Retirement Systems
Ordinary Income: What It Is and How It’s Taxed | Investopedia
IRS reminds taxpayers their Social Security benefits may be taxable | IRS
Tax Deferred: Earnings With Taxes Delayed Until Liquidation | Investopedia
Required Minimum Distributions: What’s New in 2026 | Charles Schwab
