Here’s what that means for your retirement planning: the money you’ve been saving all these years will face different tax rules when you start using it. Many people discover that understanding these rules early can save them thousands of dollars and help them plan better withdrawal strategies.

Think of it this way – you’ve spent decades putting money into various retirement buckets, and each bucket has its own tax rules when you take money out. Some withdrawals are completely tax-free, others are taxed like regular income, and some fall somewhere in between.

Traditional 401(k) and IRA Withdrawals

Money you contributed to traditional retirement accounts gave you tax deductions when you put it in, which means you’ll pay taxes when you take it out. These withdrawals count as ordinary income, so they’re taxed at the same rates as your paycheck used to be.

Here’s what works well: if you’re in a lower tax bracket in retirement than you were during your working years, this system works in your favor. Many people discover they can manage their tax bracket by controlling how much they withdraw each year.

Required Minimum Distributions (RMDs) start at age 73, meaning the IRS requires you to withdraw a certain percentage of your account balance annually. The IRS provides worksheets to calculate these amounts, which increase as you get older.

Roth Account Withdrawals

Roth 401(k) and Roth IRA withdrawals work completely differently. Since you paid taxes on this money before contributing it, qualified withdrawals are tax-free. This includes both your contributions and any investment growth.

For Roth IRAs, you can withdraw your contributions anytime without taxes or penalties. However, to withdraw earnings tax-free, the account must be at least five years old and you must be 59½ or older.

Roth accounts don’t have RMDs during your lifetime, making them excellent for estate planning and giving you more control over your tax situation in retirement.

Social Security Taxation Rules

Many people discover that Social Security benefits can be taxable, depending on your total income. Combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. The IRS uses this “combined income” formula to determine if your benefits are taxable.

If this total exceeds $25,000 for individuals or $32,000 for married couples filing jointly, up to 50% of your benefits may be taxable. Higher income levels can make up to 85% of benefits taxable.

Pension Payment Taxation

Traditional pensions are typically taxed as ordinary income when you receive payments. However, if you contributed after-tax dollars to your pension, that portion comes back to you tax-free.

Most employers provide a statement showing how much of your pension represents after-tax contributions versus pre-tax contributions and employer contributions. This helps determine what percentage of each payment is taxable.

State Tax Considerations

State taxation of retirement income varies dramatically. Some states like Florida, Texas, and Nevada have no state income tax at all. Others like California and New York tax retirement income at regular rates.

Several states offer special treatment for retirement income. Pennsylvania doesn’t tax distributions from 401(k)s, IRAs, or pensions. Illinois doesn’t tax retirement account distributions for people over 59½.

If you’re considering relocating in retirement, research state tax policies on retirement income as part of your decision-making process.

Strategic Withdrawal Planning

Here’s your action plan for managing taxes in retirement: consider which accounts to tap first based on your current tax situation and future needs.

Many people discover that a mix of withdrawal sources gives them the most flexibility. For example, you might withdraw from traditional accounts up to the top of your current tax bracket, then switch to Roth accounts or taxable investment accounts for additional income needs.

This approach helps manage your tax bracket while preserving tax-free Roth money for later years when you might need larger withdrawals for healthcare expenses.

Tax-Loss Harvesting in Taxable Accounts

Money in regular investment accounts (not retirement accounts) has different tax rules. When you sell investments for more than you paid, you’ll owe capital gains taxes. However, you can also use investment losses to offset gains.

Long-term capital gains (investments held over one year) are taxed at 0%, 15%, or 20% depending on your income level – generally lower than ordinary income tax rates.

Consider holding growth investments in taxable accounts and income-producing investments in tax-deferred accounts. This strategy, called asset location, can reduce your overall tax burden.

Healthcare and Medicare Considerations

Higher income in retirement can increase your Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). These surcharges apply to Medicare Part B and Part D premiums based on your income from two years prior.

The Medicare IRMAA income thresholds show how additional income affects your premiums. Sometimes it makes sense to limit withdrawals to stay below IRMAA thresholds.

Health Savings Account (HSA) withdrawals for qualified medical expenses are always tax-free, making HSAs excellent retirement planning tools if you can avoid using them during your working years.

Working with a Tax Professional

Tax rules change frequently, and retirement taxation involves complex interactions between different income sources. Many people discover that working with a qualified tax professional or fee-only financial advisor pays for itself through tax savings and peace of mind.

Consider annual tax planning meetings rather than just tax preparation. This proactive approach helps you make smart decisions about retirement account contributions, Roth conversions, and withdrawal timing.

What works well is starting these conversations several years before retirement, giving you time to implement strategies like Roth conversions during lower-income years or optimizing your state of residence for tax purposes.