Taxes don’t stop when you retire. In fact, for many retirees, taxes become their single biggest expense. Without the right strategy, you could pay more than necessary, cutting into your hard-earned savings. But with smart planning, you can lower your tax bill and stretch your retirement income further.

Why Retirement Taxes Catch People Off Guard

When you’re working, taxes are relatively straightforward—your employer withholds them from your paycheck, and you file once a year. But in retirement, your income comes from multiple sources, each with different tax rules:

• Social Security benefits – Up to 85% of your benefits could be taxable, depending on your income.

• Required Minimum Distributions (RMDs) – Once you turn 73 (or 75 if born on or after January 1, 1960), you must start withdrawing from traditional IRAs and 401(k)s, increasing your taxable income.

• Pension payments and annuities – Typically taxed as ordinary income.

• Investment income – Interest, dividends, and capital gains can add to your tax burden.

Without a proactive plan, taxes can take a big chunk out of your retirement income.

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How Social Security Benefits Are Taxed

If Social Security is your only source of income, you may not owe taxes on it. But if you have other taxable income, part of your Social Security could be taxed.

How much of your Social Security is taxable?

To reduce the tax impact, manage withdrawals from other accounts carefully to avoid pushing your income into taxable Social Security thresholds.

How Pensions Are Taxed in Retirement

Pension income is fully taxable at your ordinary income tax rate if you didn’t pay taxes on your contributions. If you made after-tax contributions, part of your pension withdrawals may be tax-free.

A few key considerations:

• Lump-sum payouts from pensions are fully taxable in the year received unless rolled into an IRA.

• State tax rules vary—some states tax pensions, others don’t.

• If you move after retirement, check whether your new state taxes pension income.

Standard Deductions for Retirees

The IRS offers a higher standard deduction for retirees aged 65 and older.

Standard Deductions for Taxpayers Age 65 or Over (Tax Year 2025)

For 2024 tax returns (filed in 2025), the standard deduction amounts are slightly lower:

Standard Deductions for Taxpayers Age 65 or Over (Tax Year 2024)

If your taxable income falls below these thresholds, you won’t owe federal income tax. However, filing a tax return may still be beneficial to claim tax credits or refunds.

Tax Brackets for 2024 and 2025

Your tax bracket determines how much of your retirement income is taxed. Here are the federal tax brackets for 2024 and 2025:

Tax Brackets for 2024 (Returns Filed in 2025)

How Pensions Are Taxed in Retirement

Pension income is fully taxable at your ordinary income tax rate if you didn’t pay taxes on your contributions. If you made after-tax contributions, part of your pension withdrawals may be tax-free.

A few key considerations:

• Lump-sum payouts from pensions are fully taxable in the year received unless rolled into an IRA.

• State tax rules vary—some states tax pensions, others don’t.

• If you move after retirement, check whether your new state taxes pension income.

How 401(k) and IRA Withdrawals Are Taxed

Withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income. The more you withdraw, the higher your tax bracket.

Key points:

• Traditional IRA withdrawals are fully taxable unless you made non-deductible contributions.

• Roth IRA withdrawals are tax-free if you meet the five-year and age rule.

• Roth 401(k) withdrawals may also be tax-free if certain conditions are met, but employer contributions may be taxable.

Manage Taxes on Investments in Retirement

Investment accounts come with different tax treatments:

• Interest from bonds and savings accounts is taxed at your regular income rate.

• Qualified dividends and long-term capital gains get lower tax rates (0%, 15%, or 20%).

• Taxable brokerage accounts allow flexibility—no required withdrawals and tax-free basis step-ups for heirs.

Tax-loss harvesting can offset gains, reducing taxable income. Selling losing investments strategically can save money on taxes.

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Gifts and Estate Taxes

If you want to pass wealth to your heirs tax-efficiently, consider gifting during your lifetime.

• You can give away more money tax-free in 2025. The annual gift tax exclusion has increased to $19,000 per recipient, up from $18,000 in 2024. That means you can give up to $19,000 to as many people as you’d like without triggering gift taxes or affecting your lifetime estate tax exemption.

• The federal estate tax exemption has also gone up. In 2025, you can pass on up to $13.99 million tax-free, whether through gifts during your lifetime or as part of your estate. That’s an increase from $13.61 million in 2024.

• One thing to keep in mind: current tax laws are set to change after 2025 when the Tax Cuts and Jobs Act expires. This could significantly lower the estate tax exemption, so if you're thinking about making large gifts or estate transfers, now might be the time to act. Talking to a tax professional can help you make the most of these rules while they last.

Smart Ways to Reduce Your Retirement Taxes

1. Plan Roth Conversions Wisely

A Roth IRA conversion allows you to move money from a traditional IRA or 401(k) into a Roth IRA. You’ll pay taxes on the amount you convert now, but withdrawals will be tax-free in retirement assuming you meet certain conditions.

When should you do this?
The years between retirement and when RMDs start—often called the "golden window"—are an ideal time for Roth conversions. Your income is usually lower, so you can convert at a lower tax rate.

How to maximize benefits:

• Convert smaller amounts over several years to avoid jumping into a higher tax bracket.

• Pay conversion taxes with non-retirement savings to keep more money in your Roth IRA.

• Watch out for Medicare premium surcharges—higher income can trigger them.

2. Manage Required Minimum Distributions (RMDs) Strategically

Starting at age 73 (or 75 if born on or after January 1, 1960), the IRS requires you to withdraw a certain amount from traditional retirement accounts each year. These withdrawals are taxed as ordinary income, which can push you into a higher bracket.

Ways to reduce the tax hit:

• Convert to a Roth IRA before 73 (or 75) to lower future RMDs.

• Use a Qualified Longevity Annuity Contract (QLAC) to delay some RMDs until age 85.

• Withdraw strategically before RMDs kick in to smooth out taxable income.

3. Use Charitable Giving to Lower Taxes

If you don’t need all your RMD money, donating it directly to charity through a Qualified Charitable Distribution (QCD) is a tax-smart move.

• For 2025, you can donate up to $108,000 directly from your IRA.

• The donation doesn’t count as taxable income, helping lower Social Security taxes and Medicare premiums.

• If done properly, you can satisfy your RMD requirement without increasing your tax bill.

4. Hold Investments in the Right Accounts

Where you hold your investments can make a big difference in how much tax you pay.

• Hold taxable bonds and REITs (which generate regular income) in tax-deferred accounts.

• Keep growth stocks in taxable accounts for lower capital gains tax rates.

• Use Roth IRAs for high-growth investments, since withdrawals are tax-free.

Tax-loss harvesting—selling underperforming investments to offset gains—can also help reduce taxable income.

5. Time Social Security Benefits Strategically

Social Security benefits become taxable once your income crosses certain thresholds. To minimize taxes:

• Delay Social Security and use withdrawals from other accounts first.

• Coordinate taxable, tax-deferred, and tax-free income sources for lower taxes.

6. Factor in State Taxes

Some states tax retirement income, while others don’t. If you’re considering a move, check how your new state treats:

• Social Security benefits

• Pension income

• IRA and 401(k) withdrawals

Even if a state has no income tax, property taxes and sales taxes can still impact your bottom line.

7. Plan Your Estate to Minimize Taxes

Leaving money to heirs? Some strategies can help reduce estate taxes:

• Use gifting strategies to transfer wealth tax-free during your lifetime.

• Set up trusts to control how assets are distributed and reduce tax exposure.

• Donate appreciated assets to charity to lower estate taxes.

Don’t Let Taxes Eat Into Your Retirement Savings

Taxes don’t have to be a retirement surprise. With the right strategy, you can keep more of your money and make your savings last longer.

Ready to take control of your retirement income? Download Mastering Retirement Income now and start building a steady, secure financial future.

Reference

Internal Revenue Service. (n.d.). Don’t Forget, Social Security Benefits May Be Taxable. Retrieved from https://www.irs.gov/newsroom/dont-forget-social-security-benefits-may-be-taxable.

Social Security Administration. (n.d.). Income Taxes on Social Security Benefits. Retrieved from https://www.ssa.gov/policy/docs/research-summaries/income-taxes-on-benefits.html.

Social Security Administration. (2024). Retirement Benefits 2024. (pp. 12-13). Retrieved from https://www.ssa.gov/pubs/EN-05-10035.pdf.

Internal Revenue Service. (n.d.). IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable. Retrieved from https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable.

Internal Revenue Service. (n.d.). IRS Releases Tax Inflation Adjustments for Tax Year 2025. Retrieved from https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025.

Investopedia. (n.d.). Will You Pay Taxes During Retirement? Retrieved from https://www.investopedia.com/articles/retirement/12/will-you-pay-taxes-during-retirement.asp.

Empower. (n.d.). What Taxes Do I Pay in Retirement? Retrieved from https://www.empower.com/the-currency/money/what-taxes-do-i-pay-in-retirement.

IRS. (2024). IRS Releases Tax Inflation Adjustments for Tax Year 2025. Retrieved from https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025