Managing Retirement Taxes
Retirement Income Taxability at a Glance
Many people hope that retiring means leaving tax concerns behind. Unfortunately, taxes continue to play a significant role even after you stop working.
Unexpected tax bills can undermine a carefully built retirement plan. That’s why it’s important to understand how taxes can impact your retirement income—so you can make informed choices and budget accordingly.
The exact amount you’ll pay in retirement taxes depends on your personal situation and the sources of your retirement income. Still, most retirees are surprised by how much taxes can take from their income.
| Income Source | Taxable? | Notes |
|---|---|---|
| Traditional IRA/401(k)/403(b)/457 Withdrawals | ✅ Yes | Ordinary income tax; early withdrawals may trigger penalty |
| Roth IRA Withdrawals (Qualified) | ❌ No | Must meet 5-year rule and age 59½ for earnings |
| Pension Income | ✅ Yes | May be partially tax-free if funded with after-tax dollars |
| Social Security Benefits | ✅ Yes (up to 85%) | Depends on total income and IRS rules |
| Non-qualified Annuity Withdrawals | ✅ Yes (on earnings only) | After-tax contributions not taxed; earnings taxed as income |
| Interest, Dividends, Capital Gains | ✅ Yes | Taxed same as before retirement |
| Life Insurance Proceeds | ❌ No | Generally tax-free to beneficiaries |
Study Finds Taxes as… the Biggest Expense in Retirement?
A Lincoln Financial Group study surveyed affluent retirees—people ages 62 to 75 with annual household incomes above $100,000. The research found that federal income taxes were the single largest expense for this group, accounting for nearly one out of every three dollars spent in retirement.
According to the report, “Taxes represent the greatest expense incurred by this group. They are greater than many individuals planned for prior to retirement—and a growing source of concern.”
The same study found many retirees weren’t familiar with their actual tax rates. On average, respondents reported marginal rates of 26% for federal and 7% for state taxes, yet nearly 39% did not know their federal rate and more than half (58%) did not know their state rate.
| Major Retirement Expenses | Percentage of Spending |
|---|---|
| Federal & State Taxes | 33% |
| Healthcare | ~20% |
| Housing & Utilities | ~20% |
| Food, Travel, Other | 27% |
Source: Lincoln Financial Group, 2010, updated for context. Percentages rounded for clarity.
How to Plan for Taxes in Retirement
Tax planning doesn’t stop at retirement. The good news is, with a little foresight, you can reduce surprises and feel more confident about your after-tax income. Here are a few steps to help you prepare:
- Estimate Your Retirement Income: Make a list of all potential income sources—Social Security, pensions, IRAs, annuities, investments, and part-time work.
- Understand Tax Treatment: Use the table above to see which income streams are taxable, partially taxable, or tax-free.
- Anticipate RMDs: If you have pre-tax retirement accounts, know when you must start required minimum distributions (RMDs) and plan for the resulting tax impact. See chart below.
- Explore Tax Diversification: Consider blending different account types—like Roth IRAs or certain life insurance policies—to help manage your taxable income in retirement.
- Coordinate Withdrawals: Be strategic about the timing and amount of withdrawals to avoid bumping yourself into a higher tax bracket or causing more of your Social Security to be taxable.
- Get Guidance on Insured Strategies: Foxcove Financial can help you understand insured retirement strategies, annuity options, and withdrawal rules. For questions about your personal tax situation, be sure to consult your CPA.
What Retirement Income is Taxed?
Every retiree’s tax situation is different, but there are common patterns. You may owe taxes on retirement account withdrawals, investment gains, and sometimes on Social Security benefits.
Retirement Account Distributions
Most withdrawals from traditional retirement accounts are taxable because contributions were tax-deferred. In 2025, the majority of retirement assets remain in pre-tax accounts.
- For example, compare traditional and Roth IRAs.
- As of 2025, traditional IRAs hold the majority of assets, while Roth IRAs account for a smaller share.
Withdrawals from tax-deferred vehicles like IRAs, 401(k)s, 403(b)s, and 457 plans are counted as taxable income. Roth IRA withdrawals, if qualified, are generally tax-free, but you must have held the account for at least 5 years to withdraw earnings tax-free.
Early withdrawals (before age 59½) from retirement accounts usually trigger a 10% IRS penalty, in addition to income tax. It’s a good idea to talk with your CPA before making early withdrawals to understand the full tax impact.
| Account Type | Taxable When Withdrawn? | Early Withdrawal Penalty? |
|---|---|---|
| Traditional IRA/401(k)/403(b)/457 | ✅ Yes (taxable in retirement) | ✅ Yes (10% before age 59½) |
| Roth IRA (qualified) | ❌ No (if requirements met) | ✅ Yes (10% on early withdrawals) |
| Pension | ✅ Yes | ❌ No |
| Non-qualified Annuity (after-tax contributions) | ✅ Yes (on earnings) | ✅ Yes (10% before age 59½) |
Required Minimum Distributions (RMDs) for 2025
| Account Type | When RMDs Begin | How RMDs Are Taxed | Missed RMD Penalty |
|---|---|---|---|
| Traditional IRA/401(k)/403(b)/457 | April 1 of year after turning 73 (if 73 in 2025 or later) | Ordinary income tax | 25% penalty on amount not taken |
| Roth IRA | N/A (no RMDs for account owner) | Tax-free if qualified | None |
RMD rules updated for 2025. Consult your CPA for personal RMD calculations.
Pension and Annuity Income
Pension benefits are generally taxable because most were funded with pre-tax income. You can request taxes to be withheld directly from your pension payments. If you contributed after-tax dollars, part of your payments may be tax-free.
The tax rules for annuity payments depend on whether your contract was funded with pre-tax (qualified) or after-tax (non-qualified) money. Qualified annuity distributions are fully taxable. With non-qualified annuities, only the earnings are taxed.
Like with retirement accounts, a 10% IRS penalty may apply to annuity withdrawals before age 59½. For guidance on your personal tax situation, consult your CPA.
Foxcove Financial can help you explore insured strategies—such as fixed annuities and certain life insurance policies—that may help reduce taxable income and provide a more predictable retirement plan. These approaches can supplement your Social Security and pension, giving you added flexibility. While these strategies are not tax or investment advice, they can be an important piece of a well-rounded retirement income plan. For personalized tax guidance, consult your CPA.
Don’t Forget Investment Income
Interest, dividends, and capital gains continue to be taxed in retirement as before. If you sell investments to create retirement income, you’ll face capital gains (or losses), depending on how long you held the investment.
Understanding the tax consequences of selling investments—and learning how to manage gains or losses—can help you avoid surprises at tax time.
Social Security Giveth, Social Security Taketh Away
According to the Lincoln Financial Group study, Social Security is the most common retirement income source. Salaries, pension and retirement plan withdrawals, and investment earnings also remain important for retirees.
Social Security benefits were originally designed to be tax-free, but as more retirees earn income from multiple sources and live longer, the IRS began taxing a portion of benefits for those above certain income levels. Many retirees are caught off guard when withdrawals from IRAs or part-time work increase their combined income, pushing more of their Social Security into the taxable range.
- Common Mistake: Not factoring in RMDs or extra earnings that raise your taxable Social Security amount.
- Pro Tip: Coordinate withdrawals and consider Roth conversions or insurance strategies to help control taxable income and manage the impact on Social Security taxes.
You may have to pay taxes on up to 50%–85% of your Social Security benefits, depending on your overall income and IRS rules.
How Much of Your Social Security Benefits Could be Taxable?
If your income is above certain thresholds, the IRS may tax a portion of your Social Security benefits. The IRS bases this on your “provisional income,” which includes your adjusted gross income, 50% of your Social Security benefits, and any tax-exempt interest.
| Filing Status | Combined Income Threshold | % of Benefits Taxed |
|---|---|---|
| Single, Head of Household, or Qualifying Survivor | $25,000–$34,000 | Up to 50% |
| Single, Head of Household, or Qualifying Survivor | Above $34,000 | Up to 85% |
| Married Filing Jointly | $32,000–$44,000 | Up to 50% |
| Married Filing Jointly | Above $44,000 | Up to 85% |
| Married Filing Separately | Any amount (special rules apply) | Up to 85% |
These rules are current for the 2025 tax year. For questions about your personal tax situation, be sure to consult your CPA.
Looking for Guidance?
If you’re ready to take the next step in planning your retirement with confidence, Foxcove Financial is here to help. We’ll walk you through your options, answer your questions, and help you evaluate solutions that align with your long-term goals. We specialize in insured strategies designed to protect and grow your retirement income. Call us at 609.807.8502 or schedule an appointment.