For many retirees, the transition from working years to retirement marks a shift in how income is earned and taxed. While you may no longer receive a paycheck, the money you draw from savings, retirement accounts, and investments is still subject to taxation. Understanding the tax implications on retirement income is a critical part of building a plan that supports your lifestyle and helps preserve your savings throughout retirement. 

Different sources of income in retirement are taxed in different ways. Some distributions may be fully taxable, while others may be partially taxed or not taxed at all. Without a thoughtful strategy, you may end up paying more in taxes than expected—especially as required minimum distributions (RMDs) begin and tax laws change over time. 

Retirement Income Sources and How They’re Taxed 

The first step to understanding the tax implications on retirement income is knowing how various income streams are treated by the IRS. Here’s a quick overview: 

• Traditional IRAs and 401(k)s: Withdrawals are generally taxed as ordinary income. Once you reach age 73 (as of 2025), RMDs are required. 

• Roth IRAs and Roth 401(k)s: Qualified withdrawals are typically tax-free, which can be advantageous later in retirement. 

• Social Security Benefits: Depending on your total income, up to 85% of your benefits may be taxable. 

• Taxable Investment Accounts: Income from dividends, capital gains, and interest is taxed based on the type of income and your tax bracket. 

• Pensions and Annuities: These are usually taxed as ordinary income, although the exact amount depends on how contributions were made. 

The mix of income you draw from these sources can significantly affect your overall tax liability each year. 

Understanding the Standard Deduction and Tax Brackets 

In retirement, your taxable income may be lower than during your working years, but how you manage your withdrawals matters. As of 2025, the standard deduction for a married couple filing jointly is $30,000, which can help reduce your taxable income. However, if your income exceeds certain thresholds, it can push you into a higher tax bracket or increase the taxable portion of your Social Security benefits. 

By strategically timing withdrawals and understanding how different income sources interact, you may be able to reduce unnecessary tax burdens and make more efficient use of your retirement savings. 

Managing Required Minimum Distributions (RMDs) 

RMDs are one of the most significant tax-related factors for retirees with traditional retirement accounts. Once you reach age 73, you’re required to withdraw a certain amount each year, regardless of whether you need the income. These withdrawals are fully taxable and can push you into a higher bracket. 

A proactive approach—such as converting some traditional IRA assets to Roth accounts before RMDs begin—may help reduce future tax obligations. Managing your tax bracket year by year becomes especially important once RMDs are factored into your income plan. 

The Role of Roth Accounts in Reducing Tax Exposure 

Roth IRAs and Roth 401(k)s are valuable tools for managing the tax implications on retirement income. Because contributions are made with after-tax dollars, qualified withdrawals are tax-free. This makes Roth accounts particularly effective later in retirement when you may want to supplement your income without increasing your tax liability. 

In some cases, retirees may benefit from Roth conversions—gradually moving funds from a traditional IRA to a Roth IRA while paying taxes at today’s potentially lower rates. This can provide greater control over taxable income in the future. 

The Hidden Tax on Social Security Benefits 

Many retirees are surprised to learn that Social Security income may be taxable depending on their combined income. The IRS considers the sum of your adjusted gross income, nontaxable interest, and half of your Social Security benefits when determining how much of your benefit is subject to tax. 

Managing your withdrawals from other sources—including choosing when to tap into tax-deferred accounts—can reduce the percentage of your Social Security income that becomes taxable. This coordination is an important aspect of tax-efficient retirement planning. 

Coordinating Income Streams for Greater Tax Efficiency 

Retirement planning is not just about how much you’ve saved, but how you use those savings. Coordinating withdrawals across various accounts—taxable, tax-deferred, and tax-free—can help smooth out your tax liability and potentially reduce the total amount paid over time. 

For example, using taxable accounts first while allowing tax-deferred accounts to grow, or incorporating Roth income in higher-income years, can help spread the tax burden more efficiently. These strategies require careful planning and ongoing adjustments based on market conditions, income needs, and changing tax laws. 

Planning Ahead for the Tax Implications on Retirement Income 

At Fredericks Wealth Management, we help clients understand and plan around the tax implications on retirement income by creating strategies tailored to their specific circumstances. By thoughtfully coordinating your income sources, accounting for RMDs, and exploring tax-efficient options like Roth conversions, we aim to help you pursue a retirement plan that’s adaptable and aligned with your long-term financial goals.