Taxes in Retirement: How Your Retirement Income Is Taxed

In retirement, withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income, up to 85% of your Social Security benefit can be taxable, and only Roth withdrawals come out completely tax-free. Tax does not stop when your paycheck does. It just changes shape. The good news is that, unlike when you were working and your income was largely fixed, in retirement you often have real control over your taxable income, because you choose which accounts to draw from and when. That control is one of the most underused tools in retirement planning.

This caught me off guard. I had assumed that once I retired my tax life would get simpler. Instead I discovered that the choices I made about where to take money from could swing my tax bill by thousands of dollars, and even change what I paid for Medicare. Here is how the pieces fit, in plain English. For the wider context, see retirement planning, and for how this shapes the order you spend accounts, retirement withdrawal strategies.

Traditional withdrawals: taxed as ordinary income

Every dollar you withdraw from a traditional 401(k) or IRA is taxed as ordinary income, at the same rates as a salary. This is the deal you signed up for when you took the tax break on the way in: the government deferred the tax, and now it collects. A $40,000 withdrawal from a traditional IRA is treated just like $40,000 of wages for federal income tax.

That makes traditional accounts your most tax-sensitive source of income, because large withdrawals can push you into a higher bracket, increase how much of your Social Security is taxed, and even raise your Medicare premiums. It is also why the order you withdraw from your accounts matters so much.

Social Security: up to 85% taxable

Up to 85% of your Social Security benefit can be subject to federal income tax, depending on your total income for the year. It is never fully taxed, and lower-income retirees may pay nothing on it, but the more other income you have, the more of your benefit gets counted. Someone living mostly on Social Security with small withdrawals might pay little or no tax on their benefit; someone taking large traditional withdrawals on top will usually see the maximum 85% counted as taxable.

This creates a knock-on effect worth understanding: a big traditional withdrawal does not just get taxed itself, it can also drag more of your Social Security into the tax net. For how the benefit itself works, see Social Security explained and when to claim Social Security. States vary, and many do not tax Social Security at all.

RMDs: the IRS makes you withdraw

Starting at age 73, the IRS forces required minimum distributions from your traditional accounts, and each one is taxed as ordinary income. The required age rises to 75 in 2033. The point of RMDs is to make sure the government eventually collects the deferred tax, so you cannot leave a traditional account growing untaxed forever.

RMDs can be a nasty surprise. If you have left a large traditional balance untouched, the forced withdrawals can be big enough to bump you into a higher bracket and raise your Medicare premiums, all without you choosing to spend the money. Roth IRAs have no RMDs for the original owner, which is one of their quiet advantages. Some people deliberately draw down traditional accounts in their sixties, before RMDs and often before claiming Social Security, to shrink future RMDs.

Why having different account types helps

Holding money across traditional, Roth, and taxable accounts gives you levers to control your taxable income each year. This is sometimes called tax diversification, and it is genuinely powerful:

• Traditional 401(k)s and IRAs: withdrawals are fully taxable as income.
• Roth IRAs and Roth 401(k)s: qualified withdrawals are completely tax-free and do not count toward the income that taxes your Social Security or triggers IRMAA.
• Taxable brokerage accounts: only the gains are taxed, often at lower long-term capital-gains rates.

With all three, you can mix and match each year to keep your taxable income in a sensible range, perhaps filling up the lower brackets with traditional withdrawals and topping up with tax-free Roth money to avoid crossing a threshold. In low-income years, some people do Roth conversions, moving money from traditional to Roth and paying tax now at a low rate to enjoy tax-free withdrawals later.

IRMAA: when income raises your Medicare premiums

IRMAA is an income-related surcharge that higher earners pay on top of their standard Medicare Part B and Part D premiums, based on income from two years prior. The standard Part B premium was about $185 a month in 2025, adjusted each year, and IRMAA adds to that for higher-income retirees.

The two-year lookback is the trap. A large one-off withdrawal, a big capital gain, or a sizable Roth conversion this year can raise your Medicare premiums two years from now, even if your income drops back. So timing large taxable events around the IRMAA thresholds is part of careful planning. For how Medicare works overall, see Medicare explained.

Managing your tax bracket

The thread running through all of this is bracket management: smoothing your taxable income across the years rather than letting it spike. That can mean drawing a bit from traditional accounts every year instead of letting RMDs balloon, doing Roth conversions in low-income years, and watching the Social Security and IRMAA thresholds before taking a large withdrawal.

This is general information, not tax advice, and the rules are detailed and change each year, so figures here are for the current year and should be verified. Managing retirement taxes is one of the clearest cases for working with a fiduciary advisor or a tax professional, as we cover in choosing a financial advisor. The IRS at irs.gov and Medicare.gov have free, authoritative information on the current rules.