How the IRS Taxes Retirement Income
It's important to know how common sources of retirement income are taxed at the federal and state levels.


Navigating taxes in retirement can be challenging. Your tax situation may differ from your working years due to income and tax bracket changes. Required withdrawals from retirement accounts and income from other sources can also affect your tax liabilities.
That’s why it's crucial to know how common sources of retirement income are taxed. Having this information can help you develop a tax-efficient strategy for your retirement years.
Retirement income tax 2025: What's new?
As it does every year, the IRS has made inflation adjustments that impact taxpayers, including retirees.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- For example, the standard deduction has increased to $15,000 for single filers and $30,000 for married couples filing jointly.
- For those 65 and older, the extra standard deduction is $2,000 for singles. It's $1,600 per qualifying individual for those married filing jointly or separately.
- Additionally, individuals age 60 to 63 can now make so-called "super catch-up" contributions to their 401(k) plans under the SECURE 2.0 Act.
Those changes offer new opportunities for tax planning and potential retirement savings.
Now, let's dive into how the IRS taxes different types of retirement income.
Is retirement income taxable?
Comprehensive retirement planning involves considering various sources of income and understanding how they are taxed at the federal and state levels. But thankfully, there are several types of income the IRS doesn't tax.
For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable.
Additionally, earned income in states with no income tax isn't subject to tax at the state level.
Related: Types of Income the IRS Doesn't Tax
Still, your tax planning should consider the tax treatment of income from annuities, pensions, Social Security benefits, and retirement savings accounts.
You will also want to assess tax liability from various investments, earnings, and proceeds.
Here's a breakdown of some common retirement income sources and a brief description of their federal tax implications. (More below on state taxes on retirement income.)
How some income in retirement is taxed
Social Security Benefits: Depending on provisional income, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates.
Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions.
Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.
Sales of Stocks, Bonds, and Mutual Funds: Long-term gains (held over a year) are taxed at 0%, 15%, or 20% capital gains tax rates, based on income thresholds. Net investment income tax (NIIT) factors in for some taxpayers. at a rate of 3.8%.
Dividends: Qualified dividends are taxed at long-term capital gains rates; non-qualified dividends are taxed as ordinary income based on your federal tax bracket.
Traditional IRAs and 401(k)s: Contributions to traditional IRAs and 401(k)s reduce your taxable income. However, withdrawals are taxed at ordinary income rates. Required minimum distributions (RMDs) start at age 73. Withdrawals before age 59 ½ are subject to a tax penalty.
Roth IRAs and Roth 401(k)s: Contributions to Roth accounts are not tax-deductible. However, withdrawals after five years following the first contribution are tax-free for Roth IRAs, including gains. Withdrawals before age 59 ½ are subject to a tax penalty.
Life Insurance Proceeds: Life insurance proceeds are generally not subject to tax when received as a beneficiary. However, surrendering a policy for cash may have tax implications.
Savings Bonds: Bond interest is generally taxable at ordinary income rates upon maturity or redemption but may be tax-free for education expenses if certain conditions are met.
Annuities: For annuities, the portion representing the principal is tax-free; earnings are taxed at ordinary income rates unless purchased with pre-tax funds.
Home Sales: Under the Section 121 home sale exclusion, primary home sale gains up to $250,000 ($500,000 for married couples) are excluded from income tax if specific ownership and use criteria are met.
Which states don't tax retirement income?
Crafting a tax-efficient retirement strategy requires careful consideration of various income sources and their tax implications.
- Seek professional guidance if you need help making decisions that maximize your retirement funds and minimize tax burdens.
Also, note that while this article focuses on federal taxes on different types of retirement income, it is essential to consider the impact of state and local taxes on your finances. (There are more than a dozen states that don't tax retirement income.)
To learn more about how all 50 states and the District of Columbia tax retirement, see Kiplinger’s report on Taxes in Retirement.
Related Content
- The Age When You Stop Paying Taxes on Social Security
- These States Won't Tax Your Pension Income
- How All 50 States Tax Retirees
- IRS Tax Breaks That Get Better With Age
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
-
Medicare Prior Authorization Expands to Ambulatory Surgical Centers
Starting in December, Medicare will begin requiring prior authorization for certain procedures when performed in ambulatory surgical centers.
-
Frontier’s GoWild! Annual Flight Pass: Is the $299 All‑You‑Can‑Fly Deal Worth It?
Frontier’s GoWild! Pass offers unlimited flights for $299, but blackout dates, standby rules, and fees apply. See who benefits and if it’s worth it.
-
New $6,000 'Senior Bonus' Deduction: What It Means for Taxpayers Over Age 65
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
Claiming the Standard Deduction? Here Are Ten Tax Breaks For Middle-Class Families in 2025
Tax Breaks Working middle-income Americans won’t need to itemize to claim these tax deductions and credits — if you qualify.
-
Are Trump Tariffs Even Legal? Three Things to Know About the Latest Court Ruling
Tax Law The outcome of this legal battle over tariffs will hit your wallet in one way or another.
-
Over Age 65? New $6,000 'Senior Bonus' Deduction Is Available Even If You Itemize
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
Another State Rebels Against Trump’s New 2025 Tax Law: What Now?
State Taxes Even if states adopt tax policies in the so-called ‘big beautiful bill,’ lawmakers may have workarounds at their fingertips.
-
Is Trump's Tax Plan Speeding Up the Looming Social Security Funding Crisis?
Social Security Social Security's combined retirement funds are running out of cash, and its insolvency date is expected to occur in less than a decade.
-
New Trump Tax Bill: Five Changes Homeowners Need to Know Now
Tax Changes Trump’s new tax legislation is reshaping how tax breaks for homeowners work.
-
Will You Get a ‘Surprise’ Tax Bill on Your Social Security Benefits in Retirement?
Retirement Taxes Social Security benefit payments might land you in hot water when filing 2025 taxes — here are three reasons why.