The truth about how much Retirement Benefits are taxed
Michael Hart | August 31, 2025
When people think about how they have saved for retirement, they tend to assume that the amount of money sitting in their account is what they’ll use to live on. Au contraire, mon frere! Taxes are a huge factor – don’t let them sneak up on you! In this article, we’ll discuss how different types of retirement benefits are taxed.
Sound okay?
But first –
As an advice only planner, we earn one fee for any and all advice we give you – independent of how much money you have.
We think it’s fairer that way.
Agree?
Because we are ultra-focused on helping you make smarter financial decisions – not just selling you products or trying to find the next hot stock tip – we entertain questions and write them up on our blog. And that’s what we’re doing this month with our blog about how much tax gets taken out of your “retirement check.”
And, we’ll try to answer it in two minutes or less.
Check out these blogs below that we’ve written about various financial planning topics for mid-career professionals.
Buying a house probably isn’t a good investment
Now for the feature presentation!
Two Minute Take
So here’s our take on how your retirement money (Social Security, etc.) is likely going to be taxed. Remember nothing in this blog counts as financial or tax advice specific to you – this is just general guidance. If you need specific recommendations, we suggest you speak with a CPA or financial advisor.
Here’s what we’re about to discuss:
What retirement age is in the United States
What sources of income people usually rely on in retirement (what people usually define “retirement benefits” to be
What you should do after once you know how much tax is going to be taken out of your retirement income stream
How to fix all this into your retirement plan
What is retirement age, anyways?
The age at which you retire is a personal decision. Most people define “retirement age” as the time when you become eligible for Social Security benefits. This page breaks out when you can start to receive Social Security benefits.
Here’s a super-brief summary:
The earliest you can get Social Security is 62 (but you won’t be the full amount)
Full retirement age is 70 (you’ll get a higher amount)
We said it would be quick, didn’t we?
(Wink)
Getting into this further would derail the blog, so we suggest you consult the Social Security Administration and/or a financial advisor for more info, but generally people are considered of retirement age when they are between 62 and 70 years of age in the United States.
And what happens then?
Well, most people usually quit their job and start living off their savings (minus tax). Which gets us to the next point – what will be the tax amount that you pay, once you start taking those retirement benefits?
What are “retirement benefits”, anyways?
Most people, when they hear “retirement benefits”, just think of Social Security. But that’s not the whole enchilada. People are living off all types of income streams in retirement in addition to that, such as:
401(k), 403(b), or other workplace retirement account benefits
Roth IRA distributions
Traditional IRA distributions
Pension payments
Annuity payments
The list goes on. In an effort to avoid putting you to sleep, we’ll get right to the point about how each of these types of retirement income streams tend to be taxed. Just remember, this is general guidance and we are not your accountant.
Promise?
Okay, let’s get to it!
But first…some vocabulary
Before we go on, let’s review some general tax terminology.
(Yawn)
Okay, we’ll make it quick – don’t worry.
Capital gains tax – this is the rate you pay when you sell an asset. The tax rate is determined based upon how long you held the asset. See the IRS website about capital gains tax rates for more details.
Ordinary income tax – this is a tax you pay when you take income. The rate you pay depends on what tax bracket you fall into. If your income rises and you get bumped into the next highest bracket, you pay a higher tax rate on the portion of income that falls into that higher bracket. You do not pay the higher tax rate on the entire amount of income. This link from the Tax Foundation breaks out the 2025 tax brackets.
Taxes are waged by the Federal government, the states, and local authorities such as municipalities. For this blog, we’ll speak only about Federal taxes.
The bottom line
Here’s a primer on which tax rates apply to your retirement benefits.
Social Security – up to 85% of your Social Security benefits can be taxed, depending on how much income you are earning overall as a household. See this IRS website for more information. These benefits are taxed at the ordinary income rate.
Traditional IRA – distributions are taxed at the ordinary income tax rate (assuming IRA withdrawal rules are honored)
Roth IRA – If you contributed to your Roth IRA with after-tax money, no tax is paid on these distributions. However, if you put money into your Roth IRA before you paid tax on it, you’ll pay the ordinary income tax rate on the pre-tax amount. This is called the “taxable basis.” This may occur in the case of a Roth conversion. To gain further clarity, visit this Roth IRA questionnaire on the IRS website. It’s worth noting that in order for distributions to be tax free, you must be at least age 59 1/2 , and the account must have been funded for at least five years.
401(k) and other employer retirement plans – Any distributions are taxed at the ordinary income rate, if a Traditional 401(k) plan. If Roth 401(k), distributions are tax free.
Annuity payments – Similar to the Roth IRA, payments may or may not be taxable depending on what the taxable basis of the annuity contract is. If your payments come from money you used to fund they contract that was already taxed, they are tax-free (essentially because you already paid tax on it). However, if you funded the annuity using pre-tax money, your payments are taxed.
Pension payments – Just like the Roth IRA and annuities, if you contributed to your pension with taxed money, no tax is taken out when you start getting payments. However, if you paid into the pension with pre-tax money (which is usually the case), payments are taxed at the ordinary income tax rate.
Here’s a summary.
Okay…so we (kind of) simplified this for the purpose of not putting you to sleep. Remember, we’re not your CPA – don’t interpret this information as advice specific to you. Speak with your tax advisor for guidance that applies specifically to you.
Creating an overall retirement plan
All of this is important, but what plays an even bigger part in determining your retirement success or failure is having an overall financial plan. Before you stop working, you should gain a picture of:
What the income is likely to be, after-tax
What your expenses will be
How you’ll get health insurance
What major contingencies could occur (health risks, home maintenance costs, caring for loved ones, etc.)
If you want our help in creating a retirement plan, please send me a note and let’s talk.
-Michael
Michael Hart, CFP® is an advice only financial planner for mid-career professionals in Princeton, New Jersey.
P.S.
We are fee-only, flat fee advisors in Princeton, NJ who help mid-career professionals build wealth. If you’d like to meet with us to discuss retiring in New Jersey, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.
Sources
Durante, Alex. (2024, October 22 nd ). Tax Foundation. 2025 Tax Brackets. https://taxfoundation.org/data/all/federal/2025-tax-brackets/
IRS. Tax Topics. Topic no. 409, Capital gains and losses. https://www.irs.gov/taxtopics/tc409
IRS.IRS Tax Tips. IRS reminds taxpayers their Social Security benefits may be taxable. https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable
IRS. Retirement Plans. IRA FAQs - Distributions (withdrawals). https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
IRS. Interactive Tax Assistant. Is the distribution from my Roth account taxable?https://www.irs.gov/help/ita/is-the-distribution-from-my-roth-account-taxable
Social Security. Starting Your Retirement Benefits Early. https://www.ssa.gov/benefits/retirement/planner/agereduction.html
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