Types Of Retirement Income And How They’re Taxed

March 25, 2023

Retirement is supposed to be a time of relaxation and zero worries. Unfortunately, many retirees know very little about the tax implications of retirement incomes, which can cause a great deal of unwanted stress and confusion during the golden years. By better understanding what they are in for, retirees can get the greatest value out of their retirement income and spend more time enjoying the many fruits of their labors. To start off on the right foot, start reading this list of the types of retirement income and how they are taxed.


Different from a 401(k) plan, this type of retirement plan guarantees a certain amount of monthly income once an employee retires. Conversely, a 401(k) plan is determined by the amount of money an employee chooses to contribute during their career. While this type of retirement plan is becoming less and less common, it is still important to understand how it is taxed. Because most employees don’t contribute to this type of retirement plan like a normal retirement account, the payout in retirement per month is usually fully taxed as regular income.

If an employer gave you the opportunity to contribute after-tax dollars to the employer-sponsored plan, this amount of money would not have to be taxed upon its distribution to the retiree. To figure out how much tax applies to an employer-sponsored plan, you have to figure out the annual value of the distributions. This value will put you into a tax bracket, which determines the tax taken out of every eligible dollar.

Continue reading to learn about bonds and mutual funds.

Bonds And Mutual Funds

The majority of bonds are subject to taxes, aside from some individual securities such and municipal bonds, because almost all bonds generate income for the retiree. Municipal bonds are typically also exempt from state and local tax, although exceptions to these rules do apply in certain states. Like a pension, most bond income distributions are subject to regular income tax rates. However, because mutual funds are typically made up of many bonds, the tax rate that must be paid is the cumulative average tax rate of the individual bonds within. For example, if half of the bonds in the fund were tax-free and the other half were fully taxable, half of the retirement income you receive from this particular mutual fund would be subject to taxes. Because every mutual fund is unique in its bond makeup, there is no hard and fast rule for taxation.

Get the details on 401(k)s and 403(b)s next.

401(k) And 403(b)

Both of these tax plans are types of tax-advantaged retirement plans that delay when taxes must be paid on the money within the retirement vehicle. Some employers offer a 401(k) plan, which enables them to put money into an account comprised of various securities before taxes are paid on those monies. A 403(b) account is similar to a 401(k) retirement account, except it is limited to use by only some public school employees as well as full-time employees of nonprofit organizations. A huge benefit to these accounts is you can deduct the contributions from your taxable income each year to lower your tax burden. This means, on average, less is taken out of every dollar you make.

You can begin withdrawing from a 401(k) or 403(b) at the age of fifty-nine and a half. These withdrawals in retirement are then subject to whatever income tax rates are in place at the time of the withdrawal. Thus, if you do not plan to retire for the next thirty years and are participating in an employee-sponsored 401(k) or 403(b) retirement plan, your taxes could look very different than they do today. Congressional tax changes could have either positive or negative impacts on your retirement depending on whether future income tax brackets are higher or lower than the present day.

Continue reading to reveal key details about Roth IRAs.

Roth IRAs

A Roth individual retirement account (IRA) is perhaps the exact opposite of a 401(k). Whereas all contributions to a 401(k) are pretax dollars, all contributions to a Roth IRA are post-tax dollars. Retirees are allowed to begin withdrawing from this account as early as fifty-nine and a half years old. Because taxes have already been paid on the contributions to this tax shelter, there are no taxes on any withdrawals during retirement. This can potentially hedge against the risk that tax rates will be much further in the future during your retirement than they are today. Many retirees enjoy this type of account because no taxes must be accounted for when making qualified withdrawals.

Continue to learn about savings and money market accounts.

Savings And Money Market Accounts

Savings accounts receive very small amounts of interest while money market accounts can offer a higher rate that is variable depending on the economic climate at the time. This is a popular retirement savings vehicle, however, because there are very few associated risks like there are with stocks and other investments. The cutoff for the amount of interest that must be earned to be considered for taxation is ten dollars. If the total interest in an account is less than this figure, you will not receive a form 1099-INT and do not have to include this on your annual income taxes. If you earn more than ten dollars in interest from a savings or money market account, you will be taxed at your particular income tax rate. If the bank or financial institution paying you interest does not provide a 1099-INT, be sure to ask for one before filing your taxes each year.

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