Taxes in Retirement: How Every Source of Income Is Taxed in 2026

By its source. The tax code sorts retirement income into four groups: ordinary income (pensions, traditional IRA and 401(k) withdrawals, interest, wages), income taxed at capital gains rates (qualified dividends and long-term gains), partly taxed income (Social Security, annuities with a cost basis), and tax-free income (qualified Roth withdrawals, municipal bond interest, the excluded part of a home sale). The same dollar of spending can cost nothing or cost 40 cents, depending on which account it came from.

Three other tests run alongside the income tax and use their own definitions of income: how much of your Social Security is taxable, whether you pay the Medicare surcharge called IRMAA, and whether you owe the 3.8% net investment income tax. The table shows which income counts for each. It is worth printing.

Leaving work removes one tax entirely. Payroll tax, 7.65% of wages for an employee, applies to earned income only, so pension, IRA and investment income never carries it. That alone makes a dollar of retirement income cheaper than a dollar of salary.

Yes. Every dollar you take from a traditional IRA, 401(k) or 403(b) is ordinary income in the year you take it, unless it represents after-tax contributions you made. Reaching 59½ removes the 10% early-withdrawal penalty; it does not remove the income tax. The withdrawal is added to your other income and taxed at your top rates, which is why the order and timing of withdrawals matter more than the account they come from.

You cannot defer forever. Required minimum distributions start at 73, or 75 if you were born in 1960 or later. The first one can wait until April 1 of the following year, but then two distributions land in the same tax year. A missed RMD carries an excise tax of 25% of the shortfall, cut to 10% if you correct it within two years (IRS RMD FAQs). Roth IRAs and, since 2024, Roth 401(k)s have no required distributions during the owner's life. Our RMD calculator projects the required amount year by year.

Roth withdrawals are tax-free when they are qualified: you are 59½ or older and five years have passed since the first year you contributed to any Roth IRA (IRS Publication 590-B). Inherited IRAs follow different rules, usually a ten-year payout for adult children; see our guide to the inherited IRA 10-year rule.

When you leave an employer, a direct rollover moves the money to an IRA without tax. A check paid to you instead has 20% withheld, and you must replace that 20% from other money within 60 days or it becomes taxable. Employer stock held in the plan may qualify for net unrealized appreciation treatment, which a rollover forfeits. Our 401(k) rollover guide covers both.

Up to 85% of it is, for most readers of this site. The IRS starts with provisional income (also called combined income): your adjusted gross income without Social Security, plus tax-exempt interest, plus half your benefits. On a joint return, up to 50% of benefits become taxable once provisional income exceeds $32,000, and up to 85% above $44,000. For single filers the lines are $25,000 and $34,000 (IRS Publication 915). Married couples who file separately and lived together at any time in the year have a base amount of zero.

Three details matter. First, municipal bond interest is tax-free but still counts in provisional income, so it can make Social Security taxable. Second, “up to 85%” is a ceiling on the share of benefits taxed, not a tax rate: the taxable part is added to your income and taxed at your bracket. Third, in the income range where the taxable share is still rising, each extra dollar of IRA income also makes 50 or 85 cents of benefits taxable. That is the “tax torpedo”: in the 22% bracket, a dollar that drags 85 cents of benefits with it is taxed at 40.7%. The worked example below shows where the zone falls.

Age does not matter: benefits are taxed the same way at 62 or 92. The 2025 tax law did not end taxation of benefits; it added the senior deduction described below, which offsets part of it for incomes under the phase-out. Our guide to when to claim Social Security covers how claiming age interacts with taxes and Roth conversions.

A pension is fully taxable as ordinary income if you never contributed after-tax money to it, which is the usual case for private-sector plans. If you did contribute after-tax dollars, part of each payment is a tax-free return of that cost, figured under the IRS Simplified Method for qualified plans (IRS Publication 575). The plan's Form 1099-R usually shows the taxable amount. Our guide to pension lump sum vs. annuity covers the choice at retirement, including rolling a lump sum into an IRA to keep it tax-deferred.

A nonqualified annuity, one bought with after-tax money outside a retirement plan, is taxed differently. If you annuitize it, each payment is split between a tax-free return of your cost and taxable earnings under the IRS General Rule. If you instead withdraw from it before annuitizing, the withdrawal comes out of earnings first, so it is fully taxable until the gains are exhausted (IRS Publication 575). The earnings are ordinary income, not capital gains, and count as investment income for the 3.8% tax. The annuity payout calculator estimates the payment.

Long-term capital gains and qualified dividends are taxed at 0%, 15% or 20%, and they are stacked on top of your ordinary income. For 2026, the 0% rate applies up to $98,900 of taxable income on a joint return ($49,450 single), and the 20% rate starts above $613,700 ($545,500 single) (IRS, Revenue Procedure 2025-32). Because gains sit on top, every dollar of IRA income pushes a dollar of gains out of the 0% band and into the 15% band. Interest, non-qualified dividends and gains on assets held one year or less are ordinary income.

Some gains have their own ceilings: collectibles such as gold coins and bullion funds are taxed at up to 28%, and the part of a real estate gain that reflects depreciation you took (unrecaptured section 1250 gain) at up to 25%. Net capital losses offset gains without limit and up to $3,000 of ordinary income a year, with the rest carried forward (IRS Topic 409).

Above modified AGI of $250,000 joint or $200,000 single, a 3.8% net investment income tax applies to the smaller of your investment income or the excess. Investment income here means interest, dividends, capital gains, rents and nonqualified annuity earnings; IRA and pension distributions and Social Security are excluded (IRS Topic 559). IRA withdrawals are not taxed by NIIT, but they raise MAGI and can push your dividends into it. The thresholds are not indexed.

Rental income is ordinary income after expenses and depreciation, and it generally counts for NIIT; our guide to rental property in retirement works through a sale. Selling your home, you can exclude up to $250,000 of gain, or $500,000 on a joint return, if you owned and lived in it for at least two of the five years before the sale (IRS Publication 523). Long-time owners in expensive markets can exceed that; our guide to downsizing in retirement works through the numbers. And assets held until death get a new cost basis at their value on the date of death, so the gain is never taxed (IRS Publication 551). For a retiree with large unrealized gains, that makes the taxable account the one to leave to heirs and the IRA the one to spend or give away.

Retirees use the same brackets as everyone else, but get larger deductions. For 2026 the standard deduction is $32,200 for a joint return and $16,100 for a single filer, plus $1,650 for each spouse 65 or older ($2,050 if unmarried). A couple both 65 or older therefore deducts $35,500; a single filer 65 or older, $18,150 (IRS, Revenue Procedure 2025-32).

The senior deduction is new. For 2025 through 2028, each taxpayer 65 or older can deduct an extra $6,000, whether or not they itemize. It is reduced by 6% of modified AGI above $150,000 on a joint return or $75,000 otherwise, so it disappears entirely at $250,000 joint and $175,000 single, and you must show a Social Security number for each qualifying person and, if married, file jointly (IRS). Inside the phase-out, each extra dollar of income removes 6 cents of deduction per spouse, which quietly adds about 2.6% to a couple's rate in the 22% bracket.

Itemizing is less common than it used to be, but two 2026 changes matter to retirees who give or who pay high state and property taxes. The deduction for state and local taxes is capped at $40,400, reduced for incomes above $505,000 but not below $10,000. Charitable gifts are deductible only above 0.5% of AGI for itemizers, while non-itemizers get a new deduction for cash gifts capped at $1,000, or $2,000 on a joint return (IRS Topic 506).

IRMAA, the income-related monthly adjustment amount, raises Medicare Part B and Part D premiums when modified AGI from two years earlier exceeds $218,000 on a joint return or $109,000 single (CMS, 2026). It is not collected by the IRS, but it behaves like an income tax with cliffs: one dollar over a threshold triggers the whole surcharge for that tier, for each spouse on Medicare. At the first tier, a couple pays about $2,297 a year more.

Because of the two-year lag, the income you choose this year sets premiums for the year after next. A Roth conversion, a large capital gain or the sale of a rental in 2026 shows up on 2028 premiums. Our guide to Medicare enrollment and IRMAA lists every tier and explains how to appeal after retirement with Form SSA-44.

It depends entirely on where you live, and the differences are large. Eight states levy no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Washington taxes capital gains but not wages or retirement income (Tax Foundation, 2026). Among the states that do tax income, most exempt Social Security, and many exempt some or all pension or IRA income, often with age or income limits that change from year to year.

Check your own state's department of revenue rather than a ranking. The rules that matter for an affluent retiree are specific: whether IRA withdrawals and Roth conversions are exempt or only public pensions, whether the exemption is capped, how capital gains are taxed, and whether the state has an estate or inheritance tax. If you are moving, residency rules decide which state taxes a Roth conversion or a large sale in the year of the move, so time big income events for after the move is complete and documented.

Through withholding, estimated payments, or both. No employer does it for you any more, and the default settings often withhold too little. The IRS expects tax to be paid through the year: you generally owe estimated tax if you expect to owe $1,000 or more after withholding and your withholding will cover less than 90% of this year's tax or 100% of last year's. If last year's AGI was over $150,000, the second test becomes 110% (IRS Publication 505).

Estimated payments for 2026 are due April 15, June 15 and September 15, 2026, and January 15, 2027. The easier route for many retirees is withholding, because tax withheld is treated as paid evenly through the year unless you elect otherwise. That allows a useful trick: if you are behind in November, take a December IRA distribution (or your RMD) with a large share withheld, and the withholding covers the earlier quarters as well.

Illustrative example: the people and figures below are hypothetical, not real clients. Numbers are calculated from the stated assumptions.

Walter, 68, and Joan, 67, file jointly. In 2026 they receive $60,000 of Social Security between them, Walter's $30,000 pension, $80,000 of withdrawals from their IRAs and $15,000 of qualified dividends from a taxable account. They own no municipal bonds and take the standard deduction. Both were born before 1960, so their RMDs begin at 73.

Step 1: How much of their Social Security is taxable

They hit the 85% ceiling. Their adjusted gross income is $125,000 of other income plus $51,000 of taxable benefits: $176,000.

Step 2: Deductions and the tax

That is 9.4% of their $185,000 of income. Their top bracket is 22%, and their dividends get no 0% treatment because ordinary income alone fills the 0% band. Each spouse keeps $4,440 of the $6,000 senior deduction.

Step 3: What the next dollar costs

The next $1,000 from the IRA costs $246, a marginal rate of 24.6%: 22% plus the lost senior deduction. Their benefits are already at the 85% ceiling, so they are past the torpedo. The chart shows how different the rate is at lower withdrawals.

What they can do with this. They have $42,000 of room before MAGI reaches $218,000, the first IRMAA tier for 2028 premiums, and the rate stays at 24.6% all the way there. Converting that much to a Roth IRA this year costs about $10,349 of federal tax, a rate to compare with what their RMDs will face from 73, and with the single brackets a survivor would face. Had they instead taken half the IRA withdrawal and spent cash for the rest, their tax would fall to $8,324, but only by pushing the income into later years, when RMDs and a survivor's single brackets could tax it more. Once they reach 70½, qualified charitable distributions will let them give from the IRA with none of it taxed.

By controlling when income is recognized. Retirees have more control over their taxable income than they had while working, and the tools below all work the same way: fill low brackets on purpose, avoid spikes, and move income from years with high rates to years with low ones. None of them is a loophole; all are standard provisions of the tax code.

• Judging a withdrawal by the bracket. Inside the Social Security or senior deduction ranges, the rate on the next dollar is higher than the bracket. Price the whole change, not the bracket.
• Treating municipal bond interest as invisible. It is excluded from taxable income but counts toward the taxation of Social Security and toward IRMAA.
• Leaving withholding at the defaults. Ten percent on IRA withdrawals and single-status withholding on a pension usually fall short for a couple in the 22% bracket, which leads to an underpayment penalty.
• Delaying the first RMD to April 1 without checking. It puts two RMDs in one tax year and can push you into a higher bracket and an IRMAA tier.
• Ignoring the two-year IRMAA lag. A large conversion, home sale or gain shows up on Medicare premiums two years later. Plan the income, or file Form SSA-44 if a life-changing event such as retirement lowered it.
• Filing separately while living together. The Social Security base amount drops to zero, so up to 85% of benefits is taxable from the first dollar, and the senior deduction is lost.
• Selling appreciated stock to give cash. After 70½, a QCD from the IRA saves more; before then, giving the shares avoids the gain.
• Rolling employer stock into an IRA without checking NUA. The rollover turns gain that could be taxed at capital gains rates into ordinary income.

1. January: set withholding for the year: Form W-4P for a pension, W-4V for Social Security, and a W-4R rate for IRA withdrawals. Or plan estimated payments.
2. By April 15: file last year's return, then set this year's safe harbor: 100% of last year's tax, or 110% if last year's AGI was over $150,000. Pay the first estimate if you use them.
3. June 15 and September 15: second and third estimated payments.
4. After the summer: project this year's income. Find the room left to the top of your bracket, to the $98,900 0% gains line, to the senior deduction phase-out at $150,000, and to the IRMAA line of $218,000 (joint figures).
5. October to November: harvest losses or 0% gains, decide the Roth conversion amount, and choose which charities you will give to.
6. By December 31: complete Roth conversions, QCDs and RMDs; make bunched charitable gifts. If you are short on tax paid, withhold heavily from a December IRA distribution.
7. January 15: fourth estimated payment for the prior year.
8. The year you turn 73 (75 if born in 1960 or later): take the first RMD by December 31 rather than the following April 1, unless that year's income is unusually high.
9. When you retire or your income drops: file Form SSA-44 so IRMAA uses the new income, not the income from two years earlier.

Every figure used in these steps, updated each year, is on our 2026 retirement numbers page.