Retirement planning is about more than saving money. It also requires a thoughtful approach to organizing your assets in a way that minimizes tax liabilities. And an important aspect of that process is understanding how different kinds of retirement income are taxed — or, in some cases, not taxed at all.
So, to get you started, here's a summary of seven potential sources of tax-free income that could help boost your retirement finances.
Related: Check out Kiplinger's tax blog for the 2025 filing season. We're providing live updates, news, information, and commentary to help you navigate your taxes.
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Non-taxable income types to know
Some key types of retirement income aren't taxed by the IRS.
By diversifying your retirement income sources to include some of these tax-free options, you can potentially lower your overall tax burden and stretch your retirement savings further.
However, remember that tax laws are complex and subject to change, especially since the Trump administration wants to extend or make permanent key Tax Cuts and Jobs Act (TCJA) provisions. Consult a financial advisor or tax professional to understand your specific situation and stay informed about any legislative changes that may impact your retirement planning.
Note: This is not an all-inclusive list of potential non-taxable income sources.
1. Certain Social Security benefits
We’re always emphasizing that up to 85% of your Social Security benefits can be subject to tax.
The IRS uses your “combined income” to determine the taxable portion of your Social Security benefits. That amount is your adjusted gross income (AGI), tax-exempt interest, and 50% of your Social Security benefit income.
However, on the flip side, depending on your overall income, some or even all your Social Security benefits could be tax-free. For 2025, individuals with a combined income below $25,000 (or $32,000 for married couples filing jointly) could receive tax-free Social Security benefits.
For more information, see: How to Calculate Taxes on Social Security.
2. HSA distributions
Health Savings Accounts (HSAs) offer several tax advantages. First, contributions are tax-deductible. Also, growth is tax-free, and withdrawals for qualified medical expenses are tax-free at any age. (There are also some potential drawbacks of HSAs.)
And, after age 65, you can withdraw funds for any purpose without penalty, though non-medical withdrawals will be subject to income tax.
HSA contributions are subject to inflation-adjusted annual limits. Employers may also contribute to your HSA. And individuals 55 and older can make an additional $1,000 HSA catch-up contribution each year.
3. Municipal bond interest (For now)
If you reside in the issuing state, interest earned from municipal bonds is often exempt from federal taxes and sometimes state taxes. That can provide a steady stream of tax-free income, especially attractive for retirees in higher federal income tax brackets.
Municipal bonds can be particularly beneficial when you retire, as your portfolio returns might be lower due to reduced risk-taking, and your healthcare expenses may be higher.
While portfolio returns might be lower in retirement due to reduced risk-taking, that isn't always the case. And it's worth noting that while municipal bonds offer tax advantages, investors should also consider factors like yield, credit quality, and overall portfolio diversification when making investment decisions.
Also: Some Republican lawmakers in Congress are exploring the possibility of taxing municipal bond interest as part of broader tax reform efforts, although no specific legislation has been introduced yet.
4. Life insurance proceeds
Life insurance policy payouts to beneficiaries after the policyholder's death are generally tax-free. However, interest earned on the proceeds may be taxable, and tax rules can get complex if the policyholder surrenders the policy for cash.
Also, if you take a life insurance policy loan, the loan generally isn't taxable as long as the policy remains in force and the loan amount doesn't exceed the amount of policy premiums paid.
The IRS has an online tool that can help determine whether life insurance policy proceeds you've received are taxable.
5. Roth distributions
Unlike traditional retirement accounts, Roth IRAs and 401(k)s are funded with after-tax dollars. That means that qualified withdrawals in retirement, including earnings, are tax-free. To enjoy this benefit, you must be at least 59½ years old and have held the account for at least five years.
Roth 401(k)s offer an additional advantage for high-income earners who may be ineligible for Roth IRA contributions due to income limits. For 2025, individuals 50 and older can contribute an additional $7,500 to their Roth 401(k), allowing for accelerated tax-free savings.
An important update for 2025: individuals 60 to 63 are eligible for an increased “super” catch-up contribution of $11,250 if their plan allows it.
For more information, see New SECURE Super 401(k) Catch-Up Contributions for 2025.
6. Home sale capital gains (Some)
If you've lived in your primary residence for at least two of the five years before selling, you can exclude up to $250,000 of capital gains from the sale ($500,000 for married couples filing jointly).
Note: While the exclusion can be a significant source of tax-free funds, it's not tied to retirement. It applies to eligible home sales regardless of the seller's age or retirement status.
It's important to note that this home sale exclusion can only be claimed once every two years. Any profit exceeding the exclusion limit will be subject to capital gains tax.
Keeping detailed records of home improvements can help increase your cost basis and potentially reduce taxable gains.
7. Gifts and Inheritances
While not a guaranteed source of income, gifts and inheritances are generally not taxable as income to the recipient.
The IRS doesn't consider inheritances to be taxable income. That includes inheritances of cash, property, etc. However, if the money you receive from an inheritance subsequently generates income, those earnings may be taxable.
Additionally, although there is no federal inheritance tax, some states tax inheritances.
Not to be confused with inheritance tax (which is levied on the heirs of the deceased), the limit for the federal estate tax (imposed on the estate) is quite high so that most taxpayers can avoid the tax.
For 2025, the federal estate tax exemption has increased to $13.99 million per individual and $27.98 million for married couples.
Regarding financial gifts, the annual gift tax exclusion for 2025 is $19,000 per recipient and $38,000 per recipient for married couples. This allows you to give up to this amount tax-free to as many individuals as you want without using your lifetime gift tax exemption.
Note: Staying under those limits per recipient exempts you from filing a gift tax return for the year. Gifts to a single recipient exceeding the annual exclusion usually require filing a gift tax return, even if no tax is owed due to the lifetime exemption. And exceeding the limit doesn't necessarily result in owing tax, thanks to the high lifetime exemption.
Under current law, these higher exemption amounts will expire at the end of 2025. If Congress doesn't act, the exemption will revert to approximately $7 million (adjusted for inflation) in 2026. This makes 2025 a crucial year for estate planning and gifting strategies.
However, it’s worth noting that the Republican-led Congress will likely work to preserve higher exemption amounts. Stay tuned.
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