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Understanding Which Retirement Income Is Taxable — And What Isn’t Thumbnail

Understanding Which Retirement Income Is Taxable — And What Isn’t

Retirement

Introduction

Just because you're retired doesn't mean you're tax-free. Many retirees are surprised by how much of their income remains taxable. Understanding which retirement income sources are taxable—and which aren't—can help you design a smarter, more tax-efficient income strategy.

Common Taxable Retirement Income

  • Traditional IRA and 401(k) withdrawals: Fully taxable as ordinary income
  • Pension payments: Typically taxed as ordinary income
  • Annuities: Gains are taxed; original principal is not
  • Rental income: Taxable with potential deductions
  • Social Security: Up to 85% may be taxable depending on other income


Tax-Free or Partially Tax-Free Income Sources

  • Roth IRA distributions: Tax-free if account held 5+ years and you're 59½+
  • Health Savings Accounts (HSAs): Withdrawals for qualified medical expenses are tax-free
  • Municipal bond interest: Usually exempt from federal tax
  • Annuities (return of basis): Only gains are taxable; contributions may be tax-free


How Taxes Affect Retirement Planning

  • Higher income can increase your Medicare premiums
  • Poor withdrawal timing may push you into a higher tax bracket
  • Consider the tax impact on estate planning


Withdrawal Coordination Strategy

  • Use taxable accounts first for long-term capital gains
  • Follow with tax-deferred (IRAs, 401(k)s), and then Roth for tax-free access
  • Consider Roth conversions during low-income years to reduce future RMDs


Using RISA to Navigate Tax Efficiency

Different income styles may favor different tax strategies. A RISA assessment helps identify which income sources best suit your style and how to manage them tax-efficiently. Our 👉 complimentary RISA helps simplify these complex choices.

Conclusion

You worked hard to build your nest egg—now keep more of it. By understanding which income is taxable and coordinating your withdrawals, you can enjoy a more tax-efficient retirement.

FAQs

Q: What retirement income is not taxed?

A: Roth IRA distributions (if qualified), HSA withdrawals for medical expenses, and municipal bond interest.

Q: Are Roth withdrawals tax-free?

A: Yes, if the account has been held at least 5 years and you’re over 59½.

Q: How does Social Security affect my taxes?

A: Up to 85% of your Social Security benefits may be taxable depending on your total income.