Retirement Taxes: Here’s What You Need to Know Before You File

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Retirement is supposed to be about relaxation and enjoying the rewards of your hard work. But before you kick back, there’s one thing you can’t ignore: taxes. Understanding how your retirement income is taxed can help you keep more of your money and avoid any unwelcome surprises.Alert: highest cash back card we’ve seen now has 0% intro APR into 2026
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Click here to read our full review for free and apply in just 2 minutes. Here’s what you need to know before filing your taxes this year.1. Your various income streams are taxed differentlyDuring your working years, you likely had a paycheck that was taxed at a predictable rate. In retirement, things get a little more complicated. Your income may come from multiple sources, each with its own tax rules.Social Security benefits: If your combined income exceeds $25,000 for single filers, you’ll owe taxes on part of your benefits. If you’re filing jointly, add half of your Social Security payment and half of your spouse’s to the rest of your total income. You’ll be paying taxes if that number exceeds $32,000.Traditional 401(k) and IRA withdrawals: Distributions from these accounts are taxed as ordinary income. If you’re over 59 1/2 or older, you can withdraw funds without penalties, but you’ll still owe income tax.Roth 401(k) and Roth IRA withdrawals: These accounts offer tax-free withdrawals in retirement, as long as you’ve held them for at least five years.Pensions and annuities: Generally, these are taxed as regular income, but some payments might include a tax-free portion if you contributed after-tax dollars.Investment income: Capital gains and dividends are taxed if the investments are not held in a tax-advantaged retirement account. The rate varies depending on your income and how long you’ve held the investment. Capital gains taxes are lower if you’ve held the investment for over a year.2. Required minimum distributions (RMDs) can’t be ignoredIf you have a traditional 401(k) or IRA, the IRS requires you to start taking required minimum distributions (RMDs) once you reach age 73. These withdrawals are taxed at your regular income rate, and failing to take them on time can result in hefty penalties — up to 25% of the amount you were supposed to withdraw.If you don’t need the money, consider reinvesting your RMD into a tax-advantaged brokerage account like a Roth IRA or using a qualified charitable distribution (QCD) to donate up to $100,000 tax free to a qualified charity.3. State taxes matter more than you thinkFederal taxes are just one part of the equation, and state taxes can also take a bite out of your retirement income. Some states, like Florida and Texas, don’t tax income at all. Others, like California and New York, impose high state income taxes.Before you relocate in retirement, research how your new state will tax Social Security, pensions, and other income sources.4. Medicare premiums can be higher if your income is too highIf your income is above a certain threshold, you may have to pay higher Medicare Part B and Part D premiums. The extra-large medicare premiums apply to retirees with a modified adjusted gross income (MAGI) above $106,000 (single filers) or $212,000 (joint filers). Planning withdrawals strategically can help keep your income below these limits and avoid extra costs.This is not a tax in the traditional sense, but it sure feels like one. With a little planning you can keep more of your cash.5. Tax breaks for retirees can save you moneyThe good news is there are several tax breaks designed to help retirees:Higher standard deduction: If you’re 65 or older, you qualify for a higher standard deduction, reducing your taxable income.Medical expense deductions: If your medical expenses exceed 7.5% of your adjusted gross income, you can deduct them on your tax return.Senior tax credits: Some retirees qualify for the Credit for the Elderly or the Disabled, which can reduce tax liability.All the available tax breaks for you can be hard to identify on your own. Click this link to see all the tax software we’ve reviewed and find a match for your tax-filing needs.How to lower your tax burden in retirementNo one likes paying more taxes than necessary. Here are some steps you can take to keep more of your retirement income:Strategically withdraw from accounts: Mixing taxable, tax-deferred, and tax-free withdrawals can help you smooth out your tax costs from year to year.Consider Roth conversions: Converting traditional IRA or 401(k) funds to a Roth IRA in lower-income years can help you reduce taxes in the future. But you will have to pay income tax upon conversion.Take advantage of tax-loss harvesting: If you have investments in taxable accounts, selling losing investments can offset gains and reduce taxable income.Don’t wait until the last minuteTax planning in retirement isn’t a one-time event — it needs to be an ongoing strategy. If you’re unsure about the best approach, consider working with a tax professional who specializes in retirement taxes, or exploring some of the best online tax software available.Alert: highest cash back card we’ve seen now has 0% intro APR into 2026
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.”}]] [[{“value”:”

Retirement is supposed to be about relaxation and enjoying the rewards of your hard work. But before you kick back, there’s one thing you can’t ignore: taxes. Understanding how your retirement income is taxed can help you keep more of your money and avoid any unwelcome surprises.

Alert: highest cash back card we’ve seen now has 0% intro APR into 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

Here’s what you need to know before filing your taxes this year.

1. Your various income streams are taxed differently

During your working years, you likely had a paycheck that was taxed at a predictable rate. In retirement, things get a little more complicated. Your income may come from multiple sources, each with its own tax rules.

• Social Security benefits: If your combined income exceeds $25,000 for single filers, you’ll owe taxes on part of your benefits. If you’re filing jointly, add half of your Social Security payment and half of your spouse’s to the rest of your total income. You’ll be paying taxes if that number exceeds $32,000.
• Traditional 401(k) and IRA withdrawals: Distributions from these accounts are taxed as ordinary income. If you’re over 59 1/2 or older, you can withdraw funds without penalties, but you’ll still owe income tax.
• Roth 401(k) and Roth IRA withdrawals: These accounts offer tax-free withdrawals in retirement, as long as you’ve held them for at least five years.
• Pensions and annuities: Generally, these are taxed as regular income, but some payments might include a tax-free portion if you contributed after-tax dollars.
• Investment income: Capital gains and dividends are taxed if the investments are not held in a tax-advantaged retirement account. The rate varies depending on your income and how long you’ve held the investment. Capital gains taxes are lower if you’ve held the investment for over a year.

2. Required minimum distributions (RMDs) can’t be ignored

If you have a traditional 401(k) or IRA, the IRS requires you to start taking required minimum distributions (RMDs) once you reach age 73. These withdrawals are taxed at your regular income rate, and failing to take them on time can result in hefty penalties — up to 25% of the amount you were supposed to withdraw.

If you don’t need the money, consider reinvesting your RMD into a tax-advantaged brokerage account like a Roth IRA or using a qualified charitable distribution (QCD) to donate up to $100,000 tax free to a qualified charity.

3. State taxes matter more than you think

Federal taxes are just one part of the equation, and state taxes can also take a bite out of your retirement income. Some states, like Florida and Texas, don’t tax income at all. Others, like California and New York, impose high state income taxes.

Before you relocate in retirement, research how your new state will tax Social Security, pensions, and other income sources.

4. Medicare premiums can be higher if your income is too high

If your income is above a certain threshold, you may have to pay higher Medicare Part B and Part D premiums. The extra-large medicare premiums apply to retirees with a modified adjusted gross income (MAGI) above $106,000 (single filers) or $212,000 (joint filers). Planning withdrawals strategically can help keep your income below these limits and avoid extra costs.

This is not a tax in the traditional sense, but it sure feels like one. With a little planning you can keep more of your cash.

5. Tax breaks for retirees can save you money

The good news is there are several tax breaks designed to help retirees:

• Higher standard deduction: If you’re 65 or older, you qualify for a higher standard deduction, reducing your taxable income.
• Medical expense deductions: If your medical expenses exceed 7.5% of your adjusted gross income, you can deduct them on your tax return.
• Senior tax credits: Some retirees qualify for the Credit for the Elderly or the Disabled, which can reduce tax liability.

How to lower your tax burden in retirement

No one likes paying more taxes than necessary. Here are some steps you can take to keep more of your retirement income:

• Strategically withdraw from accounts: Mixing taxable, tax-deferred, and tax-free withdrawals can help you smooth out your tax costs from year to year.
• Consider Roth conversions: Converting traditional IRA or 401(k) funds to a Roth IRA in lower-income years can help you reduce taxes in the future. But you will have to pay income tax upon conversion.
• Take advantage of tax-loss harvesting: If you have investments in taxable accounts, selling losing investments can offset gains and reduce taxable income.

Don’t wait until the last minute

Tax planning in retirement isn’t a one-time event — it needs to be an ongoing strategy. If you’re unsure about the best approach, consider working with a tax professional who specializes in retirement taxes, or exploring some of the best online tax software available.

Alert: highest cash back card we’ve seen now has 0% intro APR into 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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