How Much Tax Will You Pay in Retirement?
👉 Want to learn how to retire without the worry of running out of money in retirement? Click here to watch this video
Why This Matters — And Why You Should Listen to Me
In my experience, many retirees are shocked to learn that taxes don't retire when they do. In fact, the tax bill in retirement can quietly become one of the largest line items of a retiree's lifetime expenses. Investors I've worked with have often asked, "Why didn’t anyone tell me this sooner?"
This article breaks down the major categories of retirement income and how each is taxed—not to scare you, but to equip you. Because when you understand the rules, you can build a strategy to reduce what you owe and keep more of what you’ve earned.
Summary: What You'll Learn
- How your tax burden shifts from payroll to income and investment taxes
- What types of income are taxable (and how much)
- State vs. federal taxation differences
- The role of IRMAA and Net Investment Income Tax (NIIT)
- Strategies to minimize taxes in retirement
Transitioning From Payroll Taxes
When you retire, you're no longer paying payroll taxes (FICA) on wages. These include:
Social Security tax (6.2%) on income up to $168,600 (2024 limit)
Medicare tax (1.45%), plus an additional 0.9% for high earners
If you're living on investment income or IRA distributions, you won’t pay these payroll taxes—but that doesn't mean you're off the hook.
Understanding Federal Taxation in Retirement
Now you enter the world of federal income taxes, which have their own brackets:
Ordinary Income Tax Rates (2025): 10% to 37%
Long-Term Capital Gains Rates: 0%, 15%, or 20%
Different income types fall into different buckets—and that makes distribution planning crucial.
Common Retirement Income Sources & Their Tax Implications
1. Social Security Benefits
0% to 85% of your benefits can be taxable
Taxed based on "provisional income": AGI + nontaxable interest + half of Social Security
👉 Strategic Roth withdrawals or spreading out IRA income can reduce provisional income.
2. Pension Income
Taxed as ordinary income at both federal and (in many cases) state levels
State taxation varies: some fully exempt pensions; others fully tax them
3. Traditional IRA & 401(k) Distributions
Taxed at ordinary income rates
Subject to Required Minimum Distributions (RMDs) beginning at age 73 (as of 2025)
👉 Delaying IRA withdrawals or using Roth conversions before RMD age can reduce future tax liabilities.
4. Roth IRA Distributions
Tax-free if age 59½ and account has been open at least 5 years
Not included in MAGI or provisional income
5. Capital Gains (from taxable brokerage accounts)
Short-term gains: Taxed as ordinary income
Long-term gains (held >1 year): 0%, 15%, or 20% depending on income
👉 Tax-loss harvesting and asset location strategies can reduce or defer gains.
6. Dividends
Qualified dividends: Taxed at long-term capital gains rates
Non-qualified dividends: Taxed as ordinary income
7. Interest Income
Bank/CD interest & corporate bonds: Ordinary income tax
Municipal bonds: Federally tax-free; may be state-taxed
Treasury bonds: State tax-exempt, federally taxable
8. Rental Income
Taxed as ordinary income
Can deduct depreciation, property taxes, mortgage interest, repairs
👉 Properly managed, rental properties can offer strong after-tax cash flow.
9. Annuities
Taxation depends on whether funded with pre-tax or after-tax dollars
Non-qualified annuities: Gains taxed as ordinary income
Additional Retirement Tax Costs
Net Investment Income Tax (NIIT)
3.8% surtax on investment income if MAGI exceeds $200,000 (single) or $250,000 (married)
IRMAA Surcharges
Medicare premiums increase once income exceeds $106,000 (individual) or $212,000 (joint)
Based on MAGI from two years prior
👉 Even high-income retirees who don’t pay AMT or estate taxes often get hit here.
Real-World Insight: What It Adds Up To
In my experience, the average affluent retiree could easily pay $400,000–$1M in taxes over a 30-year retirement if no planning is done. That includes:
$200K+ from IRA distributions
$100K+ in capital gains and dividends
$50K+ in Medicare IRMAA surcharges
👉 The goal isn't to eliminate taxes—it's to make them efficient.
Strategies to Lower Taxes in Retirement
Roth Conversions in low-income years
Qualified Charitable Distributions (QCDs) to reduce RMD impact
Asset Location Planning (put tax-efficient investments in taxable accounts)
Bracket Management (fill up lower tax brackets annually)
Tax-Smart Withdrawals (draw from multiple buckets strategically)
Conclusion
Your tax burden doesn’t disappear in retirement—it simply changes form. By understanding how each income stream is taxed and planning your withdrawal strategies, you can legally reduce your lifetime tax bill and increase the longevity of your savings.
👉 Want to learn how to retire without the worry of running out of money in retirement? Click here to watch this video
FAQs
Do I still pay payroll taxes in retirement?
No. Payroll taxes (Social Security and Medicare FICA taxes) stop when you stop working.
Will I owe taxes on Social Security?
Possibly. Up to 85% of your benefits may be taxable depending on your provisional income.
Can I avoid RMDs?
You can't avoid them on traditional IRAs, but you can reduce their impact with Roth conversions or QCDs.
How can I know what my total tax bill will be in retirement?
It depends on your income sources, location, and withdrawal strategies. A financial professional can model this for you.
Disclaimer: Case studies are hypothetical and do not relate to an actual client of Lock Wealth Management. Clients or potential clients should not interpret any part of the content as a guarantee of achieving similar results or satisfaction if they engage Lock Wealth Management for investment advisory services.