Taxation of Retirement Income: Federal Rules, RMDs, and State Taxes

Retirement income is taxed based on where it comes from. Withdrawals from traditional IRAs, 401(k)s, and most pensions are taxed by the federal government as ordinary income at rates that run from 10% to 37% in 2026.¹ Social Security follows a separate formula that can leave anywhere from 0% to 85% of your benefits exposed to federal tax. Qualified Roth withdrawals come out tax-free. Your total bill depends on how each account was funded, how much you pull out in a year, and the state you live in.

How Social Security Benefits Are Taxed

The IRS uses a figure called combined income to decide how much of your Social Security is taxable. You calculate it by taking your adjusted gross income, adding any tax-exempt interest, and adding half of the Social Security benefits you received during the year.² If that total stays below the threshold for your filing status, none of your benefits are taxed federally.

For single filers, combined income between $25,000 and $34,000 puts up to 50% of benefits in the tax base; above $34,000, up to 85%. For married couples filing jointly, up to 50% is taxable when combined income falls between $32,000 and $44,000, and up to 85% when it exceeds $44,000.³ These thresholds have never been indexed to inflation since they were set in 1983 and 1993, so more retirees cross them every year.

One trap catches couples off guard. If you’re married filing separately and lived with your spouse at any point during the year, your base amount is $0, meaning up to 85% of your benefits can be taxed regardless of income.³ Social Security Disability Insurance follows the same formula. Supplemental Security Income is not taxable.⁴

Traditional IRA and 401(k) Withdrawals

Every dollar you take out of a traditional 401(k) or traditional IRA counts as ordinary income in the year you withdraw it. These accounts were funded with pre-tax money, so the government collects when the money comes out.⁵ The rate depends on your total taxable income for the year. For 2026, brackets for single filers start at 10% on income up to $12,400 and top out at 37% on income above $640,600. Married couples filing jointly hit those rates at roughly double the thresholds.¹

Your plan administrator sends you Form 1099-R each January showing total distributions and the taxable portion. The IRS gets a copy, so leaving these amounts off your return triggers a near-automatic notice. A large withdrawal in a single year can push you into a higher bracket, which is why many retirees spread distributions across multiple years when they have the flexibility to do so.

Roth Withdrawals and Conversions

Roth IRAs and Roth 401(k)s flip the traditional deal. You put in after-tax money, and qualified withdrawals come out free of federal income tax. A distribution is qualified when two conditions are met: you’ve held the account for at least five tax years, and you’ve reached age 59½ (or you’re disabled, or you’re a beneficiary after the owner’s death).⁶ Meet both and you owe nothing — no income tax, no capital gains tax.

If you pull money out before satisfying both requirements, your original contributions still come out tax-free at any time, because you already paid tax on them. Earnings withdrawn early are taxed as ordinary income and may face a 10% penalty.

You can also convert a traditional IRA or 401(k) into a Roth IRA. The converted amount is taxed as ordinary income in the year of the conversion, and there’s no limit on how much you can convert.⁷ The strategy works best in years when your income is unusually low, such as the gap between leaving work and starting Social Security. Two details trip people up. If your traditional IRA holds both pre-tax and after-tax contributions, you can’t cherry-pick the after-tax money; a pro-rata rule treats each converted dollar as a proportional mix. And each conversion starts its own five-year clock for avoiding the 10% penalty on the converted amount if you’re under 59½.

Pensions and Annuities

Pension payments are fully taxable as ordinary income if your employer funded the entire plan and you never made after-tax contributions.⁸ Most private-sector pensions fall into this category, and the monthly payments are taxed like wages.

If you did contribute after-tax dollars, part of each payment is a tax-free return of your own money. Most retirees use the IRS Simplified Method, which divides total after-tax contributions by a number of expected monthly payments based on your age when payments began.⁹ Once you’ve recovered your full after-tax contribution, every payment after that is fully taxable. Private annuities purchased outside an employer plan use an exclusion ratio that stays fixed for the life of the contract.

When You Have to Start Taking Money Out

The government eventually forces you to draw down tax-deferred accounts. Under the SECURE 2.0 Act, if you turn 73 before January 1, 2033, your required minimum distributions start at age 73. If you turn 74 after December 31, 2032, they start at 75.¹⁰ In practice, people born from 1951 through 1959 start at 73, and people born in 1960 or later start at 75.¹¹ The rules cover traditional IRAs, 401(k)s, 403(b)s, and most other employer-sponsored plans. Roth IRAs are exempt from RMDs during the original owner’s lifetime.¹²

Your first RMD is due by April 1 of the year after you reach the applicable age. Every RMD after that is due by December 31. Delaying the first one to April means owing two RMDs in the same calendar year, which can spike your taxable income.

Miss an RMD and you face a 25% excise tax on the amount you should have withdrawn. Catch and correct the shortfall within two years and the penalty drops to 10%.¹² A calendar reminder for late November is cheap insurance.

Taking Money Out Before Age 59½

Pulling money from a traditional IRA or 401(k) before age 59½ generally costs an extra 10% tax on top of the regular income tax.¹³ On a $50,000 withdrawal in the 22% bracket, that’s $11,000 in federal tax plus $5,000 in penalties. The tax code carves out exceptions that waive the 10% penalty, though regular income tax still applies:

Rule of 55: leaving your job during or after the year you turn 55 lets you withdraw from that employer’s 401(k) penalty-free; public safety employees get this at 50.
Total and permanent disability, for both IRAs and employer plans.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Up to $10,000 from an IRA (not a 401(k)) for a first-time home purchase.
IRA withdrawals used for qualified higher education expenses.
Up to $5,000 per child for qualified birth or adoption expenses.
Qualified reservists called to active duty for at least 180 days.

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Ways to Reduce What You Owe

Qualified Charitable Distributions

If you’re at least 70½ and have an IRA, you can send up to $111,000 per year directly from the account to a qualified charity.¹⁵ The qualified charitable distribution counts toward your RMD but is excluded from gross income.¹⁶ Lowering gross income can reduce the taxable portion of Social Security, lower income-based Medicare premiums, and keep you out of higher brackets. For retirees who already give, it’s one of the simplest ways to cut a tax bill.

Health Savings Accounts After 65

HSA funds you built up during your working years stay available in retirement. Withdrawals for qualified medical expenses (prescriptions, doctor visits, Medicare premiums, long-term care) come out completely tax-free at any age. After 65, non-medical withdrawals lose the 20% penalty and are taxed as ordinary income, like a traditional IRA.¹⁷ Using HSA money for medical costs first preserves the tax-free benefit where it helps most.

The Extra Standard Deduction at 65

Taxpayers 65 and older get a larger standard deduction. For 2026, a single filer 65 or older can claim $18,150 ($16,100 base plus $2,050 additional). A married couple filing jointly where both spouses are 65 or older can claim $35,500 ($32,200 plus $1,650 per qualifying spouse).¹ A couple whose only income is Social Security and a modest IRA withdrawal may owe nothing at all.

Paying the Tax Through the Year

Without an employer running payroll deductions, keeping up with tax payments falls on you. Using the IRS withholding options for retirement income avoids a large lump-sum bill in April.

Social Security has no automatic withholding. You can request it with Form W-4V and choose one of four flat rates: 7%, 10%, 12%, or 22%.¹⁸ No other percentages are available. Retirees who know 85% of benefits will be taxed often find 22% closest to their actual liability.

IRA and 401(k) distributions use Form W-4R. The default on a one-time withdrawal is 10%, and you can go higher or opt out. Eligible rollover distributions from a 401(k) that aren’t rolled directly to another qualified account face a mandatory 20% withholding that can’t be reduced.¹⁹

If withholding won’t cover your total bill, you’ll need to make quarterly estimated payments using Form 1040-ES. The four due dates for 2026 income are April 15, June 15, and September 15 of 2026, plus January 15, 2027.²⁰ Missing them or underpaying results in an interest-based penalty. The IRS does offer some leniency for taxpayers who retired after age 62 within the past two years and had reasonable cause for the underpayment.²¹

State Taxes Are a Separate Question

Federal rules don’t govern what your state will do. State treatment of retirement income varies widely. A handful of states impose no personal income tax at all, so retirement distributions escape state tax entirely. Among the states that do tax income, the approach differs by source.

Most states exempt Social Security benefits from state income tax. Roughly a dozen tax them to some degree, and many of those offer partial exemptions based on age or income. Pension and IRA withdrawals get different treatment depending on where you live. Some states provide a fixed dollar exclusion for retirement income, often anywhere from a few thousand dollars up to $20,000 or more, regardless of source. Others use progressive brackets similar to the federal system. Military retirement pay and government pensions receive full or partial exemptions in many states, while private pensions don’t always get the same break.

If your state uses federal adjusted gross income as its starting point, the federal taxability of your Social Security and retirement distributions flows straight into your state return. Anyone weighing a move should compare all their income sources against the destination state’s rules, since property and sales taxes can offset the savings from a low or absent income tax.

1
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2
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3
Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
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13
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14
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15
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16
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17
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18
Internal Revenue Service. Form W-4V – Voluntary Withholding Request
19
Internal Revenue Service. Form W-4R – Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
20
Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals
21
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty