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Federal taxes on retirement income vary depending on the type of income you receive and your overall tax situation. Sources such as Social Security benefits, traditional IRA or 401(k) withdrawals, pensions and investment earnings may each be taxed differently. Some retirement income is fully taxable, while other sources may be partially taxed or tax-free. Understanding how each type of income is treated can help you anticipate your potential tax liability in retirement.
Working with a financial advisor can help you get get a more personalized look at how your income will be taxed in retirement. Connect with you advisor matches.
Federal Taxes on Retirement Income
Federal tax rates vary by income type and amount. Each source of income in retirement is taxed differently, so it helps to understand how your income streams will be treated under federal law. Here’s a breakdown of the most common taxes during retirement:
IRAs and 401(k)s
Traditional IRAs and 401(k)s provide tax-deferred growth, meaning you don’t pay taxes on the contributions or investment earnings until you withdraw the funds in retirement. Withdrawals from these accounts are generally taxable income and subject to federal income tax rates. The tax rate depends on your total income, filing status and the federal income tax brackets in effect during the year of withdrawal.
2025 Federal Income Tax Brackets
| Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $11,925 | $0 – $23,850 | $0 – $11,925 | $0 – $17,000 |
| 12% | $11,925 – $48,475 | $23,850 – $96,950 | $11,925 – $48,475 | $17,000 – $64,850 |
| 22% | $48,475 – $103,350 | $96,950 – $206,700 | $48,475 – $103,350 | $64,850 – $103,350 |
| 24% | $103,350 – $197,300 | $206,700 – $394,600 | $103,350 – $197,300 | $103,350 – $197,300 |
| 32% | $197,300 – $250,525 | $394,600 – $501,050 | $197,300 – $250,525 | $197,300 – $250,500 |
| 35% | $250,525 – $626,350 | $501,050 – $751,600 | $250,525 – $375,800 | $250,500 – $626,350 |
| 37% | $626,350+ | $751,600+ | $375,800+ | $626,350+ |
On the other hand, you fund Roth IRAs and Roth 401(k)s with after-tax contributions, meaning you pay taxes on the money before it goes into the account. Withdrawals from Roth accounts that meet qualification requirements, including both contributions and earnings, are free from federal income tax.
Taxable Accounts
Taxable accounts, such as brokerage and savings accounts, are funded with after-tax money. Interest income is taxed at ordinary income tax rates, while capital gains are taxed based on holding period: assets sold after one year qualify for lower long-term capital gains rates, while short-term gains are taxed as ordinary income.
2025 Long-Term Capital Gains Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | 0 – $48,350 | 0 – $96,700 | $0 – $48,350 | $0 – $64,750 |
| 15% | $48,350 – $533,400 | $96,700 – $600,050 | $48,350 – $300,000 | $64,750 – $566,700 |
| 20% | $533,400+ | $600,050+ | $300,000+ | $566,700+ |
Dividends are typically classified as qualified or ordinary (non-qualified). Qualified dividends meet IRS criteria and are taxed at long-term capital gains rates, while ordinary dividends are taxed as ordinary income based on your federal income tax bracket.
Pension Income
Pension income from an employer or private annuity is generally subject to ordinary income tax. If you take a lump-sum distribution, the entire amount is taxed as income in the year received. Regular monthly pension payments typically have tax withheld to help offset any tax liability when you file your return.
Earned Income
Earned income in retirement—such as wages from part-time work or self-employment—is taxed as ordinary income. In addition, wages are subject to Social Security and Medicare taxes (FICA), which add a 7.65% tax for employees or a 15.3% tax for self-employed individuals (though self-employed taxpayers can deduct half of this amount).
Earning income in retirement can affect your Social Security benefits if you are younger than full retirement age (FRA). In 2025, if you earn more than $23,400 before reaching FRA, $1 in benefits will be withheld for every $2 earned above that limit. In the year you reach FRA, the earnings limit rises to $62,160, with $1 withheld for every $3 earned above the threshold. Once you reach FRA, there is no limit—your earnings no longer reduce your Social Security benefits.
Social Security
Social Security benefits may be taxed depending on your income and filing status. To determine taxability, the IRS combines your adjusted gross income, nontaxable interest and half of your Social Security benefits. Based on this combined income, up to 50% or 85% of your Social Security benefits may be subject to federal income tax.
The chart below outlines the different possible circumstances and tax rates:
Single Filers
| Combined Income | Percentage of Social Security Income Taxed |
| $0 – $24,999 | 0% |
| $25,000 – $34,000 | 50% |
| $34,001+ | 85% |
Married Filing Jointly
| Income | Percentage of Social Security Income Taxed |
| $0 – $31,999 | 0% |
| $32,000 – $44,000 | 50% |
| $44,001+ | 85% |
Keep in mind that if you are married and choose to file a separate tax return, it is likely that you will be required to pay taxes on your benefits.
How to Minimize Your Tax Liability in Retirement
Most retirees share a common goal: reducing potential tax liability in retirement. While your income level and state of residence both affect the taxes you pay, certain strategies can help improve your tax outcomes. The tips below offer ways to help reduce taxes during retirement.
1. Remember to Take RMDS
Once you reach age 73 (or 75 if born in 1960 or later), you must take required minimum distributions (RMDs) from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. Failing to take RMDs triggers a 25% penalty on the shortfall, in addition to the income tax owed.
If you have multiple retirement accounts, you can choose which accounts to draw from to meet your RMD. With careful planning, you may manage the timing and size of withdrawals to help manage your taxable income over time.
2. Understand Your Tax Bracket
Knowing your tax bracket can help you make informed withdrawal and income decisions in retirement. You can manage taxable income to stay within a lower tax bracket and avoid triggering higher rates. Consult the federal income tax brackets for the year to guide these decisions.
3. Make Withdrawals Before You Need To
If you have a mix of taxable and tax-advantaged accounts, such as a 401(k) and a Roth IRA, you can plan withdrawals strategically. Withdrawing from taxable accounts or Roth IRAs early may help reduce future RMDs and limit future taxable income.
4. Invest in Tax-Free Bonds
Tax-free bonds, such as municipal bonds, may offer tax-efficient income in retirement. Interest from municipal bonds is typically free from federal income tax and may also be exempt from state and local taxes, depending on where you live.
5. Invest for the Long-Term, Not the Short-Term
Holding investments for more than one year in taxable accounts allows you to benefit from lower long-term capital gains tax rates. Short-term gains—those from assets held less than a year—are taxed at higher ordinary income rates.
For example, if you’re a single filer with $44,000 of income, long-term capital gains may be taxed at 0%, while short-term gains could be taxed at 12%, based on your income level.
6. Move to a Tax-Friendly State
Some states levy little or no personal income tax, which can lower your total tax burden in retirement. If relocation is an option, research factors such as cost of living, healthcare availability, and lifestyle preferences alongside tax considerations.
States that do not tax personal income are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Bottom Line
The type of income that you receive in retirement could change the way that it is taxed. Many can avoid some of this by moving to a tax-friendly state, but most people can’t avoid it entirely. It’s important to understand what your tax liability could potentially become and to plan accordingly so that you’re prepared for retirement when it comes.
Tips for Being More Tax-Efficient
- The road to financial stability in retirement looks different for everyone. Your investment account types, medical conditions and desired lifestyle can present unique challenges but a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Although Social Security is a financial lifeline for countless retirees, it can create unwanted tax ramifications. So, it’s best to avoid getting hit hard by Social Security taxes.
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