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You may know how much you have saved for retirement in an individual retirement account (IRA) or 401(k) plan and whether you’ll get money from Social Security or a pension. But do you know how that money will be taxed? Your filing status, the sources of your retirement income, and the total amount of income you receive each year will determine your taxes in retirement. And your taxes will affect how much money you really have to live on.
It’s important to understand how your retirement income will be taxed. If you’re not yet retired and still working, having this knowledge will help you figure out how much you will have after taxes. If your after-tax income seems inadequate, you can estimate how much more you will need to save before you can retire. If you’re already retired, it will tell you whether you need to do some additional planning to avoid running out of money. Understanding how taxes will affect your retirement income can help you consider ways to minimize your tax bill and maximize your retirement income.
Key Takeaways
- Up to 85% of your Social Security benefits may be taxable, depending on your total income and your filing status.
- Even if you continue to work when receiving Social Security, you will have Social Security and Medicare taxes withheld from your pay if you are an employee and, if you are self-employed, you will have to pay these taxes directly.
- Distributions from 401(k) and traditional IRA accounts are generally taxable.
- Distributions from Roth IRAs are tax-free.
- The federal tax code and some state laws provide special benefits for retirees and older taxpayers.
How Is Social Security Taxed in Retirement?
If Social Security is your only source of income, you probably will not owe taxes on it: Your income will be too low to be taxable. However, if you have other sources of income, including otherwise tax-exempt interest income, a portion of your Social Security benefits may be taxable.
More than half of Social Security beneficiaries pay some tax on their benefits. The percentage of families who receive Social Security benefits and have to pay income taxes on them was less than 10% in 1984, more than 50% by 2015, and likely to rise to 56% between 2015 and 2050, according to the Social Security Administration.
The amount of your taxable Social Security benefits depends on your combined income, i.e. the sum of (1) 50% of all your Social Security benefits for the year, (2) the adjusted gross income (AGI), and (3) tax-exempt interest income, such as interest received on municipal bonds.
Your AGI is your gross (total) income minus adjustments to that income, such as deductions and exclusions. Common sources of gross income include wages, salaries, tips, interest, dividends, IRA/401(k) distributions, pensions, and annuities.
Common adjustments to gross income include health savings account (HSA) contributions, deductions for IRA contributions, student loan interest deductions, and contributions to self-employed retirement plans.
The level of your combined income determines the portion of your Social Security benefits that is taxable. The following chart indicates the percentage of your Social Security benefits that will be subject to tax at different levels of combined income:
| COMBINED INCOME | TAXABLE PORTION OF SOCIAL SECURITY |
|---|---|
| Individual Return | |
| $0 to $24,999 | No tax |
| $25,000 to $34,000 | Up to 50% of SS may be taxable |
| More than $34,000 | Up to 85% of SS may be taxable |
| Married, Joint Return | |
| $0 to $31,999 | No tax |
| $32,000 to $44,000 | Up to 50% of SS may be taxable |
| More than $44,000 | Up to 85% of SS may be taxable |
| Married, Separate Return | |
| $0 and up | Up to 85% of SS may be taxable |
How Much Income Can a Retiree Receive Without Paying Taxes?
It depends on the sources and the total of your income. These income sources may include retirement account distributions from 401(k)s and IRAs, Social Security benefits, pension payments, and annuity income. Some people may also continue to earn some income from work, as an employee, or through self-employment, even though they may have retired from their regular or long-term employment.
Earned income
Workers nearing retirement often ask, “How much income can a retiree receive without paying taxes?” It depends on your income sources and total income amount. The Internal Revenue Service (IRS) differentiates between income types it classifies as earned and unearned.
Earnings from employment and self-employment are subject to Social Security, Medicare, and income taxes. Unearned income—for example, income from pensions, IRAs, annuities, and other investments—is subject to income tax under rules that vary by the income’s source.
If you are receiving Social Security benefits and continue to work and earn income, you will have to pay Social Security and Medicare taxes on that earned income. However, if the total of your earned income, any unearned income, and Social Security benefits is low enough, you will not owe federal income tax on it. If your AGI is equal to or less than the standard deduction for your filing status, your federal income tax liability likely is zero. (See “Standard Deductions for Retirees”, below.)
Income from IRAs, pensions, 401(k)s, and other plans
Some types of income are “unearned,” but that doesn’t mean they aren’t subject to income tax. Income from different sources may be subject to different tax rules. Ultimately, a retiree’s tax liability depends on the tax bracket applicable to his or her total taxable income.
If you claimed tax deductions for your contributions to a traditional IRA, the distributions from that IRA may be taxable, depending on the total of all your income. Similarly, distributions from a 401(k) plan or other qualified retirement account funded with before-tax contributions are taxable. If your employer funded your pension plan, your pension income is taxable. Both your income from these retirement plans and your earned income is taxed as ordinary income at rates from 10–37%.
Some individuals make “after-tax” contributions, i.e. contributions for which they do not claim tax deductions, to their IRAs. Occasionally, other types of retirement plans also are funded with after-tax contributions. The distributions from such plans are not taxed to the extent that the distributions represent the return of previously taxed contributions. The information return, Form 1099-R, sent to a taxpayer who made after-tax contributions to plans will report both the gross amount distributed as well as the taxable amount.
IRAs, 401(k)s, and similar plans are required to make annual required minimum distributions (RMDs) to beneficiaries, beginning the year they turn 72 years of age. The RMD requirement was suspended for the 2020 tax year, in response to the pandemic, but was reinstated for 2021.
Roth IRA and Roth 401(k) distributions are not taxable. Roth plans, which are funded with after-tax dollars, do not have an RMD requirement.
Income such as dividends, rents, and taxable interest from investments held outside IRAs, 401(k)s and similar plans is subject to tax at ordinary income rates of up to 37%. Capital gains rates apply to gains realized on the sale of investments. Long-term capital gains are taxed at low rates, ranging from a zero rate bracket to a rate of 20% for taxpayers with very high taxable incomes.
Because older people often have several types of taxable income, both earned and unearned, their tax rate and liability depend on the tax bracket that corresponds to their total taxable income. You determine your tax bracket in retirement the same way you did while you were working. Add up your sources of taxable income, subtract your standard or itemized deductions, apply any tax credits you’re eligible for, and check the tax tables in the instructions for Form 1040 and 1040 SR—or, more likely, put all this information into a tax software program or give it to your accountant.
Standard Deductions for Retirees
The standard deductions for 2021 are used on tax returns filed in 2022. The standard deduction for 2021 is $12,550 for single taxpayers and married taxpayers filing separately; $25,100 for married taxpayers filing jointly, and $18,800 for heads of household.
In the tax year 2022, the standard deduction for married couples filing jointly rises to $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,95, up $400, and for heads of households, the standard deduction will be $19,400, up $600.
In addition, taxpayers who are 65 years of age or older—whether or not they are retired—are eligible for an extra standard deduction of $1,700 for 2021 ($1,750 in 2022) if they are single or heads of household (and not married or a surviving spouse) and an extra $1,350 for 2021 ($1,400 in 2022) per senior spouse if they are married filing jointly, married filing separately, or a qualified widow(er).
| Standard Deductions for Taxpayers Age 65 or Over, Tax Year 2021 | |||
|---|---|---|---|
| Filing Status | Standard Deduction | Senior Bonus | Total Deduction |
| Single | $12,550 | $1,700* | $14,250 |
| Married filing jointly or qualified widow(er) | $25,100 | $1,350 per senior spouse | $26,450 or $27,800 |
| Married filing separately | $12,550 | $1,350 | $13,900 |
| Head of household | $18,800 | $1,700* | $20,500 |
| Standard Deductions for Taxpayers Age 65 or Over, Tax Year 2022 | |||
|---|---|---|---|
| Filing Status | Standard Deduction | Senior Bonus | Total Deduction |
| Single | $12,950 | $1,750* | $14,700 |
| Married filing jointly or qualified widow(er) | $25,900 | $1,400 per senior spouse | $27,300 or $28,700 |
| Married filing separately | $12,400 | $1,400 | $13,800 |
| Head of household | $18,650 | $1,750* | $20,400 |
* If not a surviving spouse, otherwise $1,350 in 2021 and $1,400 in 2022.
If your taxable total income is less than these amounts, you won’t owe any taxes. You usually won’t even have to file a tax return (unless you are married filing separately), though you may want to anyway. Filing a return allows you to claim any credits for which you might be eligible, such as the tax credit for the elderly and disabled or the earned income credit. Filing a return also ensures that you receive any refund you may be owed.
Taxpayers who itemize deductions may not claim the standard deduction and bonus amounts. It should be noted that recent increases in the standard deduction amounts mean that the threshold at which older taxpayers benefit more from itemizing than taking the standard deduction is higher. These higher standard deduction levels might affect your decisions about when to make charitable donations or pay other deductible expenses. You may be able to benefit from itemizing in some years if you can lump large itemizable expenses together so that they fall within a single tax year.
For 2020, a special benefit for certain charitable contributions is available to non-itemizers. Taxpayers who claim the standard deduction on their tax returns can deduct up to $300 of charitable contributions made in cash above the line—that is, in calculating their AGI. Certain types of contributions are not eligible for the $300 deduction, including (1) gifts of noncash property, such as gifts of securities; (2) contributions to private non-operating foundations; (3) donations to supporting organizations and new or existing donor-advised funds; (4) contributions to veterans’ organizations, fraternal societies, and certain cemetery and burial companies; and (5) contribution carryforwards from earlier years.
Tax Brackets for 2021 and 2022
For the 2021 tax year, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates and brackets are as follows:
| Tax Brackets, 2021 | ||||
|---|---|---|---|---|
| 2021 Rate | Married Joint Return | Single Individual | Head of Household | Married Separate Return |
| 10% | $19,900 or less | $9,950 or less | $14,200 or less | $9,950 or less |
| 12% | $19,900 to $81,050 | $9,951 to $40,525 | $14,201 to $54,200 | $9,951 to $40,525 |
| 22% | $81,051 to $172,750 | $40,526 to $86,375 | $54,201 to $86,350 | $40,526 to $86,375 |
| 24% | $172,751 to $329,850 | $86,376 to $164,925 | $86,351 to $164,900 | $86,376 to $164,925 |
| 32% | $329,851 to $418,850 | $164,926 to $209,425 | $164,901 to $209,400 | $164,926 to $209,425 |
| 35% | $418,851 to $628,300 | $209,426 to $523,600 | $209,401 to $523,600 | $209,426 to $314,150 |
| 37% | Over $628,300 | Over $523,600 | Over $523,600 | Over $314,150 |
Marginal tax rates for 2022 will not change but the level of taxable income that applies to each rate is going up. The top rate of 37% will apply to income over $539,900 for individuals and heads of household and $647,850 for married couples who file jointly.
| Tax Brackets, 2022 | ||||
|---|---|---|---|---|
| 2022 Rate | Married Joint Return | Single Individual | Head of Household | Married Separate Return |
| 10% | $20,550 or less | $10,275 or less | $14,650 or less | $10,275 or less |
| 12% | $20,551 to $83,550 | $10,276 to $41,775 | $14,651 to $55,900 | $10,276 to $41,775 |
| 22% | $83,551 to $178,150 | $41,776 to $89,075 | $55,901 to $89,050 | $41,776 to $89,075 |
| 24% | $178,151 to $340,100 | $89,076 to $170,050 | $89,051 to $170,050 | $89,076 to $170,050 |
| 32% | $340,101 to $431,900 | $170,051 to $215,950 | $170,051 to $215,950 | $170,051 to $219,950 |
| 35% | $431,901 to $647,850 | $215,951 to $539,900 | $215,951 to $539,900 | $215,951 to $323,925 |
| 37% | Over $647,850 | Over $539,900 | Over $539,900 | Over $323,925 |
The Bottom Line
Will you pay taxes in retirement? Unless your taxable income falls at or below the standard deduction level every year, you probably will. How much you’ll pay is another story. There are many ways to help retirees minimize their tax burden. Strategies include timing distributions, bunching income, bunching deductions that can be itemized, and doing retirement account conversions.