Taxes in retirement

Taxes in retirement: the overview

In retirement the paycheck is replaced by several kinds of income, and the tax code treats each differently. Traditional IRA and 401(k) withdrawals, pensions and interest are taxed as ordinary income in brackets from 10% to 37%^[1]. Long-term capital gains and qualified dividends get their own lower rates. Part of Social Security may be taxable. Qualified Roth withdrawals are not taxed at all. So the account you draw from, and the year you draw it, shape the tax bill as much as the amount does.

The decisions

• Using the deductions you have. The 2026 standard deduction is $32,200 on a joint return and $16,100 for a single filer, plus $1,650 per spouse aged 65 or older on a joint return ($2,050 if single)^[1]. For 2025 through 2028 there is also a $6,000 deduction for each person 65 or older, reduced by 6% of modified AGI above $75,000 ($150,000 joint)^[2].
• Harvesting the 0% capital-gains rate. Gains on assets held more than a year are long-term; short-term gains are taxed as ordinary income^[3]. Long-term gains sit on top of ordinary taxable income, and the part that falls below $49,450 of taxable income (single) or $98,900 (joint) is taxed at 0%; the 20% rate starts above $545,500 and $613,700^[1]. Selling a loss to offset gains has a limit too: the loss is disallowed if you buy substantially identical securities within 30 days before or after the sale^[8].
• Watching the thresholds that are not indexed. The 3.8% net investment income tax reaches investment income once modified AGI is above $200,000 (single) or $250,000 (joint), and those amounts are not adjusted for inflation^[5]. Social Security benefits begin to be taxed once provisional income (roughly your other income plus half your benefits) passes $25,000 single or $32,000 joint, also fixed in the law^[4].
• Paying during the year. With no employer withholding, retirees pay by estimated tax or by withholding from IRA distributions. There is generally no underpayment penalty if you paid at least 90% of this year’s tax or 100% of last year’s^[6], or 110% of last year’s if your adjusted gross income was over $150,000^[7]. Withholding counts as paid evenly through the year unless you choose otherwise, so tax withheld from a December distribution covers the earlier quarters too^[7].
• Employer stock and state tax. Employer shares taken out of a plan in a lump-sum distribution can keep their net unrealized appreciation untaxed until the shares are sold, and that appreciation is then taxed at capital-gains rates^[9]. State rules vary as much as anything federal: Texas has no personal income tax^[10], while Pennsylvania taxes income at a flat 3.07% but exempts Social Security and eligible retirement distributions^[11].

What to read, in order

Start with LTCG stacking, which explains how gains and ordinary income share the brackets, and the many MAGIs, which sorts out the different income definitions behind each threshold. Then read NIIT, state taxes in retirement (with every modeled state compared on the state pages) and estimated-tax safe harbors. For a taxable brokerage account, see tax-loss harvesting; for company stock in a 401(k), NUA and ESOP NUA. The full tables are on the 2026 brackets and 2026 contribution limits pages. How benefits are taxed is covered under Social Security.