Retirement is often seen as a time to relax and wind down. But even after your working years are behind you, there’s one thing that doesn’t retire and that is taxes. Many Americans assume that their tax burden may lighten in retirement. After all, most have worked and paid taxes their entire career. But the reality is that, even in retirement, tax brackets don’t disappear. You will still fall into a marginal income tax bracket based on your income just like when you were working. Many retirees are surprised to find they owe more than expected due to a combination of income from their various sources. Understanding how taxes work in retirement is crucial for making the most of your savings and avoiding costly surprises.  

In this blog, I will break down how taxes affect different types of retirement income and provide strategies to help you minimize your tax burden.  

1. What Types of Retirement Income Are Taxed?  

Not all retirement income is created equal. Here’s how the most common sources of income are treated:  

Social Security Benefits  

• Taxable? Sometimes.  

• If your Combined Income (Adjusted Gross Income + Nontaxable Interest + Half of your Social Security benefits) exceeds certain thresholds, up to 85% of your benefits may be taxable.  

• For individuals, the threshold starts at $25,000; for married couples filing jointly, it’s $32,000.  

Traditional IRA and 401(k) Withdrawals  

• Taxable? Generally, yes.  

• Withdrawals from traditional retirement accounts are taxed as ordinary income. The exception to this is if you are withdrawing any non-deductible contributions you have made.  

• Required Minimum Distributions (RMDs) usually begin at age 73 (based on current IRS rules) and are subject to penalties if missed.  

Roth IRA and Roth 401(k) Withdrawals  

• Taxable? Generally, no.  

• If you meet certain requirements (like being over 59½ and holding the account for at least 5 years), qualified withdrawals are tax-free.  

HSA Withdrawals  

• Taxable? Generally, no.  

• HSA withdrawals are tax-free at any age if the funds are used to pay or reimburse qualified medical expenses.  

• After age 65, you can withdraw HSA funds for any reason without penalty. However, the funds will be taxed as ordinary income if used for non-qualified expenses.  

Pensions  

• Taxable? Usually yes.  

• Most pensions are taxed as ordinary income unless you made after-tax contributions.  

Investment Income  

• Taxable? Yes, depending on the type.  

• Interest, dividends, and capital gains are taxed, though long-term capital gains and some dividends often enjoy lower rates. 

2. State Taxes Matter

State income tax rates and brackets vary widely. There are many states that do not tax Social Security benefits, and there are currently nine states that do not have a state income tax at all. States that do generally tax retirement income will tax pensions and IRA withdrawals at varying levels, and several offer exemptions, deductions, and credits.  

Relocating or planning to live part-time in a tax-friendly state can significantly reduce your tax burden. However, keep in mind that even if a state offers certain tax advantages, these are subject to change, and the state may have other types of taxes that impact retirees. 

3. Strategies to Minimize Taxes in Retirement

✅ Roth Conversions  

Consider converting portions of your traditional IRA to a Roth IRA during years with low income to reduce your future taxable RMDs.  

✅ Utilize Strategic Withdrawal Strategies  

• Conventional wisdom is to withdraw from taxable accounts first, then tax-deferred, and finally Roth accounts to optimize tax efficiency. But selling investments and large RMDSs during retirement can push you into a higher tax bracket if not planned carefully, so conventional wisdom should not always be relied upon. Enlisting the help of a trusted financial advisor early in your savings journey can help you utilize strategic withdrawals, tax diversification, and timing so that you can manage your tax bracket throughout your retirement years.  

✅ Use the Standard Deduction Wisely  

For 2025, individuals 65 and over are eligible for an increased standard deduction. Plan to take advantage of this when structuring your income stream.  

✅ Qualified Charitable Distributions (QCDs)  

If you’re 70½ or older, you can donate directly from your IRA to a qualified charity—this satisfies RMDs and avoids income tax.  

Final Thoughts  

Even if taxes never retire, you can still maximize your hard-earned money in retirement with thoughtful planning and employment of the right strategies. The earlier you start, the better. If you have questions and would like to talk with us further, please call us at 513-271-6777.

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