Issues With Income Taxes During Your Retirement

Tax-free income from retirement savings can significantly impact your retirement finances. After-tax retirement income is typically less expensive than taxable income, as tax rates can eat into your savings. At the same time, taxes eat into retirement savings at a much higher rate than the general tax burden. For example, if you are in the 25% federal tax bracket, you will pay about 4% of your tax savings each year. For most savings vehicles, you’ll need to save a higher percentage of your income to have sufficient savings at retirement. Taxes are a significant consideration when calculating the cost of retirement. According to the IRS retirement plans guidance, understanding which accounts are taxable at withdrawal is one of the most critical steps in retirement planning. This article will discuss the basics of taxes, including the specific taxes that might apply to your retirement savings and how to calculate your tax bill.

1. What taxes apply to your retirement savings?

Taxes on retirement savings fall into two categories: income and estate. Income taxes are levied on the money you earn throughout the year, whether through wages, self-employment income, or investment profits. The IRS classifies most traditional retirement account withdrawals as ordinary income, meaning they are subject to the same federal tax brackets that apply to wages. Estate taxes apply to the assets you leave to your heirs when you die. This could include the assets you own inside a traditional IRA, 401(k), or another retirement account; assets inside a taxable account, such as stocks, real estate, or artwork; or assets outside of an account, such as your home or car. Because of this, people often confuse income tax and estate tax, as they are both levied at the federal level. The IRS administers the federal estate tax, which applies only to estates exceeding the applicable exemption threshold. Both types of taxes are essential, affecting how much money you can save for your retirement.

2. How much tax will you pay on your retirement savings?

There are a few ways you can calculate the taxes you will pay on your retirement savings. If you own stocks in a taxable account inside a brokerage such as Fidelity, Charles Schwab, or Vanguard, you can use their tax calculator to determine what you’ll pay in taxes on your yearly investment profits. Similarly, if you own stocks in a taxable account outside of a brokerage, you can use sites like Yahoo Finance or Morningstar to figure out the taxes withheld from your yearly investment profits. If you own a Roth IRA inside a brokerage, you can calculate the taxes that will be withheld using the IRS Roth IRA contribution limit guidelines. Suppose you own a traditional or Roth IRA outside of a brokerage. In that case, you can calculate the taxes withheld using resources from the Financial Industry Regulatory Authority (FINRA) or the IRS directly. It is also worth noting that the Consumer Financial Protection Bureau (CFPB) provides resources to help consumers understand how different account types affect their long-term tax liability.

3. What is tax-free income during retirement?

It is nearly impossible to predict how much you will earn during your retirement. The amount of income you will receive and spend during your retirement is mainly out of control. What’s more within your control is how much you save during your working years. One of the most important things you can do to prepare for retirement is contributing as much as you can to a retirement account. There are several different retirement savings vehicles, each with advantages and disadvantages. One option you may want to consider is a Roth IRA. A Roth IRA is funded with after-tax dollars, so the money you contribute won’t be taxed when you withdraw it in retirement, according to IRS Roth IRA guidance. If you have enough income in a taxable account to pay taxes, you can contribute to a Roth IRA and avoid paying unnecessary taxes. Health Savings Accounts (HSAs), certain municipal bonds, and life insurance cash value may also provide tax-free income streams during retirement, as noted by resources from the Securities and Exchange Commission (SEC).

4. How to calculate your tax bill on retirement income

One of the most significant factors determining the cost of retirement savings is tax rates. The higher the tax rate, the more money you will need to contribute to having enough savings for retirement. To get a rough estimate of how much you will need to save for retirement, one way to calculate your tax bill on your retirement income. Let’s say you are in the 25% federal tax bracket. On $50,000 of payment, you will pay $4,000 in taxes. After accounting for your contribution to a retirement account, you will need to have $60,000 saved to reach your goal of having $1 million saved for retirement. This is your tax bill on retirement income, and you can use this number to get a rough estimate of how much you need to save. Tools from providers like Fidelity’s retirement income planner and resources published by the Department of Labor (DOL) can help you model different tax scenarios based on your income level, account mix, and projected withdrawals. Additionally, it is worth considering how Required Minimum Distributions (RMDs), Social Security income, and capital gains from taxable brokerage accounts can interact to push you into a higher bracket than anticipated.

5. Should you contribute to a Roth IRA?

Roth IRAs are a type of retirement account funded with after-tax dollars. This means that you won’t be taxed on your contributions to a Roth IRA. If you have enough income in a taxable account to pay taxes, you can contribute to a Roth IRA and avoid paying unnecessary taxes. If you contribute to a Roth IRA and the future tax rate on that money is higher than the currently proposed tax rate, you will have contributed to a tax-free savings account (TFSA) instead of a Roth IRA. For 2026, the IRS income limit for a full Roth IRA contribution is $146,000 for single filers and $230,000 for married filing jointly, as published by the IRS Roth IRA contribution limits page. If you earn above these thresholds, a backdoor Roth IRA conversion — a strategy discussed in detail by providers such as Charles Schwab — may allow you to still benefit from tax-free retirement growth.

6. The Bottom Line

The bottom line is that retirement accounts aren’t perfect. They aren’t the only way to save money for retirement, but they are a great way to get started. If you are in your 20s and 30s, you should consider contributing at least the amount of money that will be taxed on your income. If you have more than six months of expenses in a taxable account, moving some of that money into a retirement account may be time. Keep in mind that if you make too much money to be taxed at this point, the government may tax some of your income later on when you start withdrawing from savings. Resources from the Consumer Financial Protection Bureau (CFPB) retirement planning center can help you understand how different savings strategies interact with your tax situation as you approach retirement.

It may be an excellent time to contribute to a retirement account if you are young. If you have more than six months of expenses in a taxable account, moving some of that money into a retirement account may be time. Getting started early can save you thousands of dollars over your lifetime. This will help you build a nest egg and save for retirement. The Federal Reserve’s Survey of Consumer Finances consistently shows that households that begin contributing to retirement accounts earlier accumulate significantly more wealth by retirement age, reinforcing the value of starting as soon as possible.

Frequently Asked Questions

What types of retirement income are taxable at the federal level?

Most traditional retirement account withdrawals — including those from 401(k)s, 403(b)s, and traditional IRAs — are fully taxable as ordinary income at the federal level. Social Security benefits may also be partially taxable, with up to 85% subject to federal income tax depending on your combined income threshold. Roth IRA and Roth 401(k) qualified distributions are generally not taxable.

At what age do Required Minimum Distributions (RMDs) begin in 2026?

Under the SECURE 2.0 Act, Required Minimum Distributions from traditional IRAs and most employer-sponsored retirement plans must begin at age 73 as of 2026. Failing to take your RMD can result in a federal penalty of 25% of the amount not withdrawn, though this penalty may be reduced to 10% if corrected in a timely manner.

How much of my Social Security income will be taxed?

Between 0% and 85% of your Social Security benefits may be subject to federal income tax, depending on your combined income (adjusted gross income plus nontaxable interest plus half of your Social Security benefits). If your combined income exceeds $34,000 as a single filer or $44,000 for married filing jointly, up to 85% of benefits may be taxed, according to the Social Security Administration.

Is a Roth IRA always better than a traditional IRA for tax purposes?

Not always. A Roth IRA is generally better if you expect to be in a higher tax bracket in retirement than you are now, since you pay taxes upfront. A traditional IRA may be more beneficial if your current tax rate is high and you expect a lower rate in retirement. The right choice depends on your individual income, tax situation, and retirement timeline.

What is the penalty for early withdrawal from a retirement account?

Withdrawing funds from a traditional IRA or 401(k) before age 59½ typically triggers a 10% early withdrawal penalty on top of ordinary income taxes. There are exceptions for certain circumstances, such as disability, first-home purchase (for IRAs), or substantially equal periodic payments. The IRS publishes a full list of exceptions in Publication 590-B.

Can I reduce my retirement tax bill through Roth conversions?

Yes. A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA, paying taxes on the converted amount now in exchange for tax-free growth and withdrawals later. This strategy is especially effective during low-income years, such as early retirement before Social Security begins, when you may be in a lower federal tax bracket.

Do states tax retirement income?

It depends on the state. As of 2026, states like Florida, Texas, Nevada, and Washington impose no state income tax at all, while states like Illinois and Pennsylvania exempt most retirement income from state taxes. Other states, like California and New York, do tax retirement income. Relocating in retirement to a lower-tax state is a strategy some retirees use to reduce their overall tax burden.

How does the federal estate tax affect retirement account assets?

Retirement accounts such as traditional IRAs and 401(k)s are included in your taxable estate for federal estate tax purposes. In 2026, the federal estate tax exemption is approximately $13.61 million per individual. Beneficiaries who inherit traditional retirement accounts will generally owe income tax on withdrawals, and under the SECURE Act, most non-spouse beneficiaries must fully withdraw inherited accounts within 10 years.

What is the standard deduction for retirees in 2026?

For 2026, the standard deduction for single filers is $15,000, and for married filing jointly it is $30,000, according to IRS guidance. Taxpayers aged 65 or older receive an additional standard deduction amount — $1,950 for single filers and $1,550 per qualifying spouse for married filers — which can meaningfully reduce taxable income during retirement.

How can I estimate my total tax burden in retirement?

To estimate your total retirement tax burden, add all expected income sources — Social Security, traditional IRA/401(k) withdrawals, pension payments, and taxable investment income. Apply current federal and state income tax rates to that total. Free tools from providers such as Fidelity, Vanguard, and the IRS’s own Tax Withholding Estimator can help you model multiple scenarios and adjust your withholding or estimated tax payments accordingly.