Many people assume their tax bill shrinks in retirement. Sometimes it does. But retirement introduces a set of taxes that work differently from the simple payroll withholding of your working years, and several of them can take a larger bite than expected if you are not prepared.
The good news is that most of these are manageable with planning. Understanding what you will owe, and when, is the first step toward keeping more of what you have saved. Here are the seven biggest taxes to plan for.
Federal Income Tax on Tax-Deferred Withdrawals
Every dollar you withdraw from a traditional 401(k) or traditional IRA is taxed as ordinary income, at whatever your tax rate is in the year you take it.
This is the tax most retirees underestimate, because the money in those accounts has been growing untouched for decades and it is easy to think of the full balance as yours. A meaningful portion belongs to the IRS, and the bill comes due on your schedule of withdrawals. Managing which years you draw from these accounts, and how much, is one of the most powerful levers you have.
Taxes on Your Social Security Benefits
Many retirees are surprised to learn their Social Security benefits can be taxed at all. Whether they are depends on your combined income, which is your adjusted gross income plus any tax-exempt interest plus half of your Social Security benefits.
For single filers, once combined income passes $25,000, up to 50% of your benefits become taxable, and above $34,000, up to 85% become taxable. For married couples filing jointly, those thresholds are $32,000 and $44,000. No more than 85% of your benefits is ever taxable, but that is still a significant amount, and the thresholds are not adjusted for inflation, so more retirees cross them every year.
Try our Social Security Calculator to estimate your benefit and when it makes sense to claim.Required Minimum Distributions
Starting at age 73, the IRS requires you to withdraw a minimum amount from your traditional 401(k)s and IRAs each year, whether you need the money or not. These required minimum distributions (RMDs) are taxed as ordinary income.
The challenge is that RMDs are calculated as a percentage of your account balance, so the more you have saved, the larger the required withdrawal. For retirees with substantial tax-deferred savings, RMDs can push income into a higher bracket, increase the taxable portion of Social Security, and trigger Medicare surcharges all at once. This is why the years before RMDs begin are so valuable for planning.
Learn more: How Required Minimum Distributions Work, and How to Plan for Them
State Income Tax on Retirement Income
Federal tax is only part of the picture. Depending on where you live, your state may tax some, all, or none of your retirement income.
A handful of states have no income tax at all. Others exempt Social Security benefits, pension income, or both. And some tax most retirement income the same way they tax wages. This is why the state you retire in can change your after-tax income substantially, and why relocation is a legitimate part of some retirees' tax strategy. If you are considering a move, the difference in state tax treatment is worth calculating before you decide.
Capital Gains Tax on Taxable Accounts
Money held in a standard brokerage account, outside of any retirement wrapper, is taxed differently from your 401(k) or IRA. When you sell an investment for a gain, you owe capital gains tax.
The rate depends on how long you held the investment. Assets held longer than a year qualify for the lower long-term capital gains rate, which for many retirees can be as low as 0% in years when total income is modest. Assets held a year or less are taxed at your ordinary income rate, which is usually higher. Understanding this distinction, and timing sales into lower-income years, is a meaningful planning opportunity that many retirees miss.
The Net Investment Income Tax
Higher-income retirees face an additional 3.8% tax on investment income, known as the Net Investment Income Tax (NIIT).
It applies to interest, dividends, capital gains, and other investment income once your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. These thresholds are not indexed for inflation. The NIIT is easy to overlook when planning a large withdrawal or a Roth conversion, but exceeding the threshold adds a surcharge on top of your regular tax on investment income, so it is worth watching as you plan the timing of major financial moves.
Medicare Premium Surcharges
This last one is not technically a tax, but it functions like one, and it catches many retirees off guard.
Your Medicare Part B and Part D premiums are tied to your income. Once your modified adjusted gross income exceeds certain thresholds, you pay an Income-Related Monthly Adjustment Amount (IRMAA) on top of the standard premium. What makes this especially tricky is the timing: your premiums are based on the income you reported two years earlier. A large Roth conversion or a one-time capital gain at 65 can raise your Medicare premiums at 67. Planning your income with these thresholds in mind is a real part of keeping retirement costs down.
Seven taxes, three big surprises
| # | Tax | Applies to | Key number |
|---|---|---|---|
| 01 | Federal income tax | Traditional 401(k) and IRA withdrawals | Ordinary rate |
| 02 | Social Security tax | Benefits, based on combined income | Up to 85% |
| 03 | Required distributions | Traditional accounts, need it or not | Age 73 |
| 04 | State income tax | Some, all, or none of retirement income | Varies by state |
| 05 | Capital gains | Sales in taxable brokerage accounts | As low as 0% |
| 06 | Net Investment Income Tax | Investment income above MAGI threshold | +3.8% |
| 07 | Medicare surcharges | Part B and D premiums (IRMAA) | 2-yr lookback |
Swipe to see all columns
The Tax Window Most People Miss
The single most valuable tax-planning opportunity in retirement is the period between when you stop working and when your income rises again from Social Security and required minimum distributions.
During these years, your taxable income is often at the lowest it will ever be. That creates room to take deliberate action: converting portions of a traditional IRA to a Roth at a lower tax rate, realizing capital gains inside the 0% bracket, or drawing down tax-deferred accounts early to reduce future RMDs. Every dollar you move at a low rate now is a dollar you will not be forced to withdraw at a higher rate later.
This window does not last, and the decisions made during it are difficult to reverse. It is the clearest example of why retirement tax planning is best done proactively rather than at filing time.
Use low-income years before Social Security and RMDs begin.
How a Financial Advisor Helps
Coordinating these seven taxes is genuinely complex, because they interact. Drawing from the wrong account in the wrong year can raise your Medicare premiums, increase the taxable share of your Social Security, and push you into a higher bracket, all from a single decision. Getting the sequence right, across decades, is exactly the kind of work a good fiduciary advisor does in coordination with your tax professional.
If you want to understand what your retirement tax picture actually looks like, and where the opportunities are, Kapitalwise can match you with a vetted fiduciary advisor based on your situation, your goals, and your stage of life. The matching service is free, and the first conversation carries no obligation.
See what a tax-smart retirement plan could look like for you. Free, no obligation.
Find my advisorFrequently Asked Questions
Do I still pay taxes in retirement?
Usually, yes. You stop paying payroll taxes once you are no longer earning wages, but you generally still owe federal income tax on withdrawals from tax-deferred accounts, potentially state income tax, taxes on a portion of your Social Security benefits, and capital gains tax on investments sold in taxable accounts. Roth account withdrawals are the main exception, since qualified withdrawals are tax-free.
How much of my Social Security is taxable?
Up to 85%, depending on your combined income. If your combined income is below $25,000 (single) or $32,000 (married filing jointly), your benefits are generally not taxed. Above those thresholds, up to 50% becomes taxable, and above $34,000 (single) or $44,000 (married filing jointly), up to 85% becomes taxable.
What is the best way to reduce taxes in retirement?
There is no single answer, but the most effective strategies usually involve coordinating which accounts you draw from and when, using the low-income years before RMDs begin for Roth conversions or capital gains harvesting, and being mindful of the income thresholds that trigger Social Security taxation, the NIIT, and Medicare surcharges. Because these interact, a coordinated plan tends to produce better results than optimizing any one of them alone.
When do required minimum distributions start?
At age 73 for most people, rising to 75 in 2033. RMDs apply to traditional 401(k)s and IRAs but not to Roth IRAs or, as of 2024, Roth 401(k)s during the owner's lifetime.