How Will I Be Taxed in Retirement?

A couple paying their taxes in retirement

Although your effective tax rate may be lower in retirement than during your working years, depending on how your investments are allocated, you will likely still have some tax liability. Understanding how you will be taxed in retirement on different sources of income spread across various accounts can help you make decisions now to minimize your future tax liabilities. 

Which Income Will Be Taxed in Retirement? 

In general, income that is not otherwise exempt from tax and generated outside of a post-tax retirement account will count toward your taxable income. Keep in mind that you are allowed to take deductions against your income, such as the standard deduction for your filing status or your itemized deductions. 

So even though you may have to include various items in your taxable income during retirement, if your deductions equal or exceed the amount of your includable income, you may not have any income tax liability. 

Distributions From Pre-Tax Retirement Accounts 

If you’ve contributed to pre-tax retirement accounts such as traditional IRAs and 401(k)s and received a tax benefit for your contributions in previous years, distributions you take from these accounts in retirement are taxable. 

If you historically made nondeductible contributions to pre-tax retirement accounts, a portion of your distributions from these accounts may be non-taxable. 

“No-Basis” Pensions 

If you receive income from a private employer’s pension plan that you didn’t contribute anything to, your pension is considered a “no-cost” or “no-basis” pension. Distributions from these kinds of pensions are generally taxable. 


Generally, annuity income is at least partially taxable. However, a portion of your annuity payments may be tax-free based on an allocation of your cost basis in the annuity over the number of monthly payments you expect to receive. 

Non-Qualified Dividends in Taxable Accounts 

This dividend income is taxable if you’ve accumulated a stock portfolio in a normal, taxable brokerage account over the years and receive non-qualified dividends from your investments. 

What Kinds of Income Will Not Be Taxed in Retirement? 

The good news is that some items of income you may be looking at in retirement will be tax-free. 

Qualified Distributions From Post-Tax Retirement Accounts 

Accounts such as Roth IRAs and Roth 401(k)s are known as post-tax accounts because you contributed to them with money you already paid taxes on. Because you did not receive a tax benefit for contributing to them, you can now enjoy tax-free distributions from them in retirement. 

Of course, to qualify for tax-free treatment, the distributions must be qualified. For example, in the case of Roth IRAs, a distribution is qualified if it is made after you turn 59 ½ years old and is made at least five years after the first tax year in which you contributed to any Roth IRA. There are other exceptions, such as for disability. 

Qualified Distributions From Health Savings Accounts 

If you have an HSA that you are withdrawing from to cover medical expenses, those distributions are completely tax and penalty-free to you. 

Note that once you turn age 65 or become disabled, you can take non-medical distributions from your health savings account penalty-free. Still, these non-medical distribution amounts would be taxable. 


If you’re expecting to receive an inheritance in your retirement years, the good news is that it will be tax-free from a federal income tax perspective. 

Inheritances are not considered income at all for tax purposes. Of course, any income generated by inherited property could be taxable. 

Tax-Exempt Interest 

Some interest income, such as municipal bond interest income, is statutorily tax-exempt. 

Reverse Mortgage Payments 

The payments are not considered income for tax purposes if you have a reverse mortgage. Rather, they are considered non-taxable loan proceeds. 

What Kinds of Income May or May Not Be Taxed? 

There are certain items of income that, depending on certain factors, you may or may not pay taxes on in retirement. 

Rental Income 

If you own a rental property outside of a post-tax retirement account, you may or may not owe taxes on the cash flow depending on the property’s taxable income. 

Even though your rental property cash flows, it may have a loss for income tax purposes due to non-cash deductions such as depreciation. 

That said, even including the depreciation deduction, your property may still generate taxable income. 

And the depreciation deduction does not last forever—the depreciation period for residential rental property is 27.5 years, and the depreciation period for nonresidential rental property is 39 years. 

Social Security Income 

Whether your Social Security benefits are taxable depends on how much other taxable income you have. 

If the amount of your other taxable income plus your tax-exempt interest for the year is more than the amounts in the table below, your Social Security benefits may be taxable. 

If your taxable income amounts outside of your Social Security income are close to those threshold amounts, utilizing tax-saving strategies to shield as much income as possible could be beneficial. Not only do you protect that other income, but in doing so, you also possibly shield all or a portion of your Social Security income from federal income taxation. 

Qualified Dividends and Long-Term Capital Gains 

Qualified dividends and long-term capital gains are subject to special, beneficial tax rates that are generally lower than ordinary income tax rates. 

In fact, if a taxpayer’s taxable income—including the qualified dividends and long-term capital gains—are lower than the amounts below for their filing status, their qualified dividend and long-term capital gains will be taxed at a 0% rate for federal income tax purposes. 

However, if a taxpayer’s taxable income is above these threshold amounts, they will pay tax at 15% or 20% on their qualified dividends and long-term capital gains. 

How Can I Set Up My Retirement to Maximize My Tax-Free Income? 

Here are three things you can do to get on the path to maximizing your tax-free income in retirement. 

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