Retirement Planning, Elder Law, and Senior Finance

5/18/2022 | By Joy Taylor

Joy Taylor of Kiplinger’s Personal Finance discusses how retirement income is taxed, examining common sources such as Social Security benefits, other retirement funds, investments, reverse mortgages, and more.

Uncle Sam considers most forms of retirement income, but not all, fair game.

Here’s how retirement income is taxed, from several common sources, at the federal level.

How retirement income is taxed

Social Security benefits

For some Social Security recipients, the benefits escape federal income tax. For others, a portion of their benefits is taxed. To determine whether any benefits are taxable, start with your income on line 9 of Form 1040 or 1040-SR, subtract the amount of Social Security benefits you received, and add tax-free interest from municipal bonds, plus 50% of your Social Security benefits.

If this figure is at or below $25,000 ($32,000 on a joint return), the benefits are tax-free. If the number is higher, then up to 85% of your benefits are taxable as ordinary income.

IRAs, 401(k)s and pensions

Toy miniature of a senior man standing on a stack of coins, with more coins in other larger piles in front of him. For article: A look at how retirement income is taxed, examining common sources such as Social Security benefits, stocks, bonds, investments, reverse mortgages, etc.

Withdrawals from traditional IRAs and 401(k)s are taxable at ordinary income tax rates, though any after-tax or nondeductible contributions are excluded.

You can delay withdrawals, but the money can’t stay in these accounts forever. Required minimum distributions currently kick in at age 72. (People who work past age 72 can postpone taking RMDs from their current employer’s 401(k) until they retire, provided they don’t own more than 5% of the company that employs them.) Payouts before age 59 1/2 are generally slapped with a 10% tax penalty on top of the regular tax hit.

Unlike traditional retirement savings plans, Roths have no RMDs, and withdrawals are tax-free, provided you’ve held a Roth account for at least five years. But as with traditional IRAs and 401(k)s, there’s a 10% tax penalty for withdrawals made before age 59 1/2.

Pension payments are fully taxable at ordinary income tax rates when you receive them, assuming you made no after-tax contributions to the plan.

Related: Turbocharge retirement savings

Stocks, bonds and mutual funds

Capital gains from selling appreciated investments held for more than a year are taxed at favorable rates of 0%, 15% or 20%, depending on your taxable income for the year of sale. An additional 3.8% surtax affects single taxpayers with modified adjusted gross incomes over $200,000 and joint filers with modified AGI over $250,000.

Investments held for one year or less are considered short-term holdings, and gains are taxed as ordinary income. If you sell at a loss, that amount can offset capital gains for the year, plus up to $3,000 of other income. Excess losses can be carried forward.

What about dividends? Most, but not all are qualified dividends taxed at long-term capital gains rates. Nonqualified dividends are taxed as ordinary income.

Interest-bearing accounts and bonds

Ordinary income tax rates apply to interest on certificates of deposit, savings accounts, money market accounts and corporate bonds. Municipal bond interest, however, is exempt from federal tax.


If you bought an annuity that produces retirement income, the portion of each payment that represents your principal is tax-free, with the earnings taxed as ordinary income.

Reverse mortgages

The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, and you generally can’t deduct the interest that you eventually pay on the debt.

© 2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

Joy Taylor

Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit