Will You Pay Taxes During Retirement?

How Much Income Can a Retiree Receive Without Paying Taxes?

It depends on the sources and the total of your income. These income sources may include retirement account distributions from 401(k)s and IRAs, Social Security benefits, pension payments, and annuity income. Some people may also continue to earn some income from work, as an employee, or through self-employment, even though they may have retired from their regular or long-term employment.

Earned income

Workers nearing retirement often ask, “How much income can a retiree receive without paying taxes?” It depends on your income sources and total income amount. The Internal Revenue Service (IRS) differentiates between income types it classifies as earned and unearned.

Earnings from employment and self-employment are subject to Social Security, Medicare, and income taxes. Unearned income—for example, income from pensions, IRAs, annuities, and other investments—is subject to income tax under rules that vary by the income’s source.

If you are receiving Social Security benefits and continue to work and earn income, you will have to pay Social Security and Medicare taxes on that earned income. However, if the total of your earned income, any unearned income, and Social Security benefits is low enough, you will not owe federal income tax on it. If your AGI is equal to or less than the standard deduction for your filing status, your federal income tax liability likely is zero. (See « Standard Deductions for Retirees », below.)

Income from IRAs, pensions, 401(k)s, and other plans

Some types of income are “unearned,” but that doesn’t mean they aren’t subject to income tax. Income from different sources may be subject to different tax rules. Ultimately, a retiree’s tax liability depends on the tax bracket applicable to his or her total taxable income.

If you claimed tax deductions for your contributions to a traditional IRA, the distributions from that IRA may be taxable, depending on the total of all your income. Similarly, distributions from a 401(k) plan or other qualified retirement account funded with before-tax contributions are taxable. If your employer funded your pension plan, your pension income is taxable. Both your income from these retirement plans and your earned income is taxed as ordinary income at rates from 10–37%.

Some individuals make “after-tax” contributions, i.e. contributions for which they do not claim tax deductions, to their IRAs. Occasionally, other types of retirement plans also are funded with after-tax contributions. The distributions from such plans are not taxed to the extent that the distributions represent the return of previously taxed contributions. The information return, Form 1099-R, sent to a taxpayer who made after-tax contributions to plans will report both the gross amount distributed as well as the taxable amount.

IRAs, 401(k)s, and similar plans are required to make annual required minimum distributions (RMDs) to beneficiaries, beginning the year they turn 72 years of age. The RMD requirement was suspended for the 2020 tax year, in response to the pandemic, but was reinstated for 2021.

Income such as dividends, rents, and taxable interest from investments held outside IRAs, 401(k)s and similar plans is subject to tax at ordinary income rates of up to 37%. Capital gains rates apply to gains realized on the sale of investments. Long-term capital gains are taxed at low rates, ranging from a zero rate bracket to a rate of 20% for taxpayers with very high taxable incomes. 

Because older people often have several types of taxable income, both earned and unearned, their tax rate and liability depend on the tax bracket that corresponds to their total taxable income. You determine your tax bracket in retirement the same way you did while you were working. Add up your sources of taxable income, subtract your standard or itemized deductions, apply any tax credits you’re eligible for, and check the tax tables in the instructions for Form 1040 and 1040 SR—or, more likely, put all this information into a tax software program or give it to your accountant.

Standard Deductions for Retirees

The standard deductions for 2021 are used on tax returns filed in 2022. The standard deduction for 2021 is $12,550 for single taxpayers and married taxpayers filing separately; $25,100 for married taxpayers filing jointly, and $18,800 for heads of household.

In the tax year 2022, the standard deduction for married couples filing jointly rises to $25,900, up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,95, up $400, and for heads of households, the standard deduction will be $19,400, up $600.

In addition, taxpayers who are 65 years of age or older—whether or not they are retired—are eligible for an extra standard deduction of $1,700 for 2021 ($1,750 in 2022) if they are single or heads of household (and not married or a surviving spouse) and an extra $1,350 for 2021 ($1,400 in 2022) per senior spouse if they are married filing jointly, married filing separately, or a qualified widow(er).