Taxes in retirement: What you need to know about retirement income taxes

Navigating taxes in retirement can be confusing. While you may leave many things behind during retirement — such as your daily job and commuting — taxes will still be something you have to deal with. Income taxes in retirement can make a big dent in your retirement savings; therefore, it is important to know what to expect to ensure you are budgeting your retirement funds efficiently.

Income sources in retirement generally fall under two categories — ordinary income or long-term capital gains.

Ordinary income: Includes most types of income that individuals regularly earn and is taxed at the standard federal income tax rate. Examples of ordinary income include:

• Salaries or wages paid by an employer
• Interest payments (from savings accounts, certificates of deposit, bonds, etc.)
• Ordinary dividends
• Most retirement distributions (like traditional IRA or 401(k) withdrawals)
• Taxable Social Security benefits
• Rental income
• Pension payments
• Nonqualified expenses before age 65 withdrawn from Health Savings Accounts (HSAs)
• Short-term capital gains (applies to assets held for one year or less)

Long-term capital gains: Include the profits from selling certain assets that you’ve held for more than one year. Some examples include profits from:

• Stocks
• Real estate
• Mutual funds
• Sales from a business
• Securities
• Any other assets held for longer than a year

Long-term capital gains are taxed at lower rates than ordinary income, ranging from 0 to 20%, depending on your taxable income.

Understanding different tax rates, along with which tax bracket you fall under, can help you estimate how much taxes you will be paying in retirement.

Taxes on Social Security benefits

If you expect to receive Social Security benefits during your retirement, you will have to pay taxes on these benefits. The amount of taxes on retirement income from Social Security depends on factors such as your marital status and if you file joint or separate tax returns.

Up to 85% of your Social Security benefits may be taxable,² depending on your total income. Your “provisional Income” — which includes half of your Social Security benefits plus other income — determines if and how much of your benefits are taxed.

The IRS also offers different tools to help you estimate how much tax you will owe on Social Security benefits.

Taxes on pensions and traditional retirement accounts

Income from pensions or other tax-deferred retirement investment plans — such as a traditional IRA or 401(k) — is generally taxed as ordinary income and is subject to federal income taxes in retirement.

If you receive a pension from an employer plan, the payments you receive in retirement are fully taxable, given that all contributions were made with pre-tax dollars (which tends to be the case). If you made after-tax contributions, a portion of your pension may be tax-free.

Withdrawals on traditional IRAs and 401(k)s are fully taxable if you deducted your contributions during your working years. If you made non-deductible contributions, only the earnings on those contributions are subject to taxation, not the original after-tax amount.

It is also important to note that retirement income is also subject to state taxes in many cases. However, some states, such as Florida, Nevada, and Wyoming, do not tax pension, IRA, or 401(k) payments. You may want to check your state tax rules, especially if you have moved to a different state. State tax rules can sometimes influence retirees to move to a state where they can benefit from their retirement tax laws.

Required minimum distributions and Roth conversions

It is also important to keep required minimum distributions (RMDs) in mind when estimating taxes on your retirement income. As of 2025, you are required to begin taking minimum distributions from traditional IRAs, 401(k)s, and other tax-deferred accounts at age 73.³

These withdrawals are also taxed as ordinary income and can even push you to a higher tax bracket — meaning you might end up paying more taxes. If you want to avoid being pushed into a higher tax bracket, you can consider planning strategically and starting your withdrawals earlier.

You could also convert funds from a traditional IRA to a Roth IRA to reduce future taxable income and help avoid high RMDs later on. However, this should also be carefully timed, as conversions are taxed in the year they are done.

Other taxes to consider during retirement

Aside from taxes on retirement income, you should also be mindful of property and sales taxes and other surtaxes.

If you are a homeowner, your property taxes will continue into retirement. Rising property values can cause your taxes to increase, even in retirement — this can be a large tax burden for many retirees. Make sure you check your state-specific benefits, as some states offer senior property tax relief programs or freezes.

Day-to-day spendings on goods and services are still subject to state and local sales taxes. This can noticeably affect your cost of living in high-tax states, but the amount you pay also depends on your overall shopping habits.

Depending on your income, you may also be subject to the Net Investment Income Tax (NIIT) — a 3.8 % surtax that applies to certain investment incomes that exceed specific thresholds.⁴ Income from net investments includes interest, dividends, capital gains, rental and royalty income, nonqualified annuities, and more. If your net investment income is more than $200,000 for single filers, or over $250,000 if you are married filing jointly, you will have to pay the NIIT on some or all of your net investment income.⁴

If you are planning to leave an inheritance to family members and other loved ones, you should also consider any taxes that can come with this. Oftentimes, both parties can benefit from tax advantages, but you should ensure you can live comfortably on your remaining retirement funds before giving part of it away.

If you want to avoid incurring estate taxes, you could consider transferring some of your wealth and assets. This can also help reduce the burden on your retirement funds. While you should always be aware of state estate and inheritance taxes — some states have lower thresholds — federal estate taxes only apply to very large estates over $13.99 million.

Aside from leaving assets to beneficiaries, you could also consider making charitable donations and other tax-free gifts. You should discuss your options with a tax professional to ensure that you are aware of any potential benefits or downsides that may come with this.

You should also ensure to update your beneficiaries in your estate plan and any other relevant accounts if you plan to leave assets to heirs or as donations.

Having a mix of tax-deferred, taxable, and tax-free (Roth) accounts gives you more flexibility to control your tax liability each year. Tax-efficient withdrawal strategies can help stretch your retirement savings further and help avoid excess taxation of your retirement income.

One common strategy to help minimize taxes at retirement is tapping into taxable accounts first. This allows tax-deferred accounts to continue growing and may delay your RMDs. Converting funds from traditional IRAs into Roth IRAs can also help you pay taxes at a lower rate.

While there are many tax strategies to help make the most of your retirement funds, it is important that you consider your unique situation and ensure you make informed decisions. Tailoring your strategy to your situation can help make the most of your retirement funds. You should also ensure to make any changes in your withdrawal strategies or spending habits as your life circumstances change.

Retirees should plan for more than just federal income taxes to help avoid costly surprises and preserve their retirement income. Understanding how different income sources in retirement are taxed can help you effectively manage your tax burden. By using smart withdrawal and estate planning strategies, as well as taking advantage of Roth accounts, you can optimize your tax situation to work in your best interest.

To further diversify your retirement funds, you can also consider a savings account. Savings accounts can help supplement your retirement funds and serve as an extra cushion during hard times. The Raisin marketplace offers various high-yield savings options with competitive interest rates. Start diversifying your retirement funds today.

1. https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
2. https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable
3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
4. https://www.irs.gov/individuals/net-investment-income-tax