Investing Retirement Planning What Types of Retirement Income Are Taxable? Find Out Whether Your Pension, IRA, or Other Retirement Income Is Taxable By Dana Anspach Dana Anspach Dana Anspach is a Certified Financial Planner and an expert on investing and retirement planning. She is the founder and CEO of Sensible Money, a fee-only financial planning and investment firm. learn about our editorial policies Updated on January 30, 2022 Reviewed by Michael J Boyle Reviewed by Michael J Boyle Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics. learn about our financial review board Fact checked by Ariana Chávez In This Article View All In This Article Taxable Retirement Income Partially Taxable Retirement Income Tax-Free Retirement Income Calculating Taxes in Retirement Photo: katleho Siesa / Getty Images Is retirement income taxable? It depends on where that income comes from and how much of it you will have, as well as where you live. The major types of retirement income are either taxable, partially taxable, or tax-free. Learn which types of retirement income you will need to pay tax on, including pensions, retirement plans, Roth IRAs, and more. Key Takeaways Withdrawals from retirement plans and pensions and investment income from non-retirement accounts are typically taxable unless the account is a Roth account. Social Security income may be taxable, depending on your income and tax-filing status. Roth IRA and Roth 401k withdrawals and income from reverse mortgages are not taxable. Taxable Sources of Retirement Income Expect these types of retirement income to be taxable at your ordinary income tax rates: Withdrawals from retirement plans: A plan funded with pretax dollars, whether by you or your employer, will result in taxable retirement income when withdrawn. Expect withdrawals from traditional IRAs, 401(k)s, 403(b)s, SEPs, and other similar types of plans to be taxable. Note The 10% penalty on early withdrawal from IRAs was suspended for 2020 by the CARES Act. It also allowed for the income from any withdrawal to be spread out over three years to reduce the tax hit. The CARES Act also allows taxpayers to file for recovery of taxes paid if the withdrawals are repaid within three years. Pension income: Most pensions are taxable. Some types of military pensions or disability pensions may be partially or entirely tax-free. Your pension provider will send you a 1099 form at the start of each year that shows you how much of your pension is taxable. If you paid part of the cost of your pension, you can exclude part of each payment from your income. Investment income in non-retirement accounts: Dividends that occur in non-retirement accounts will be reported to you on a 1099-DIV form. Capital gains and interest will come on a form 1099-B each year. You will pay tax on most of this type of investment income as it is earned. The exception would be any capital gains that fall into the 0% tax rate. You won't pay tax on that portion of capital gains. Note Interest, dividends, and capital gains that occur within tax-deferred accounts—such as IRAs or 401(k) plans—are not taxable in the year they occur. Instead, income within these accounts is deferred until you make a withdrawal. At the time of withdrawal, the withdrawal amount is taxable. Withdrawals from an annuity: When you take withdrawals from a fixed or variable annuity (one that is not held in an IRA or retirement account), any gain must be withdrawn first. This gain is taxed as ordinary income. Partially Taxable Retirement Income The following sources of retirement income are partially taxable. How much is taxable depends on different factors. Social Security: Anywhere from 0% to 85% of your Social Security income may be taxable. At least 15% will always be tax-free. How much of your Social Security income is taxable depends on your income and tax filing status. If you are married and file separately, you will likely pay tax on your Social Security benefits. Nondeductible IRA withdrawals: If you have traditional pretax individual retirement account (IRA) contributions as well as after-tax, nondeductible IRA contributions, then a portion of each nondeductible IRA withdrawal may be considered a gain. A portion would be the return of your basis. The gain portion is taxable retirement income. Income from an immediate annuity that was purchased with after-tax money: When you buy an immediate annuity with after-tax money, a portion of each payment you receive is interest. A portion is a return of principal. The interest portion is taxable. If the immediate annuity was purchased with pretax money, such as in an IRA or other retirement account, all the income will be taxable. Cashing in a cash-value life insurance policy: Cash-value life insurance policies have a cost basis, which is usually the total of all premiums you have paid. If your cash value exceeds your basis when you cash in the policy, that portion will be taxable. Tax-Free Retirement Income The following sources of retirement income are generally tax-free: Roth IRA withdrawals: Roth IRA withdrawals are tax-free if you meet the Roth IRA withdrawal requirements. Roth IRA withdrawals are not included in the formula that determines how much of your Social Security is taxable. They also are not included in the formula that determines how much in Medicare Part B premiums you will pay. Interest income from municipal bonds: Most municipal bond income is free from federal income taxes. You may be subject to state income taxes on this form of retirement income. Income from a reverse mortgage: Monthly payments or lump sums received from a reverse mortgage are not taxable, giving a reverse mortgage a hidden advantage that many people overlook. Any return of principal or cost basis: Once all gain has been withdrawn from an annuity, you would be withdrawing your cost basis or principal. Withdrawals of basis are not counted as taxable retirement income. Gain from the sale of your home: Most people receive gains from the sale of their primary residence tax-free if the gain is less than $250,000 for a single person or less than $500,000 for married filers, and if the seller has lived in the home for at least two of last five years and meets other IRS requirements. Calculating Taxes in Retirement Taxes in retirement can vary widely, based on where the income comes from. The tax rates on the different types of retirement income can also vary widely. Income may be taxed at the ordinary income tax rate, as capital gains, or at a completely separate rate. No matter what types of income you have, always follow IRS guidelines when paying estimated taxes or preparing your tax returns. The rules for what is and is not taxable may change unexpectedly, depending on new state and federal laws. If you are unsure whether your retirement income is taxable (or, if so, at what rate), consult a tax specialist to ensure that you avoid any IRS penalties or audits. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Tax Time Guide. IRS Reminds Taxpayers of Recent Changes to Retirement Plans." IRS. "Instructions for Form 1099-DIV." IRS. "Topic No. 409 Capital Gains and Losses." IRS. "Publication 554 (2020), Tax Guide for Seniors." Social Security Administration. "Retirement Benefits: Income Taxes and Your Social Security Benefit." Insurance Information Institute. "What are Deferred and Immediate Annuities?" Fidelity. "Taxes on Social Security: 2 Ways to Save." Alliance Wealth Advisors. "How Income Affects Medicare Premiums." IRS. "Publication 550 (2020), Investment Income and Expenses."