For some retirees living on a fixed income, making ends meet can be especially challenging when everyday costs are high, as they are now. Just a couple of months ago, data showed that gasoline prices were up 27.4% from a year earlier, while grocery and housing prices keep rising.
When affordability is straining your budget, keeping more of the income you already have can make a difference. Enter taxes: another cost retirees have long had to contend with.
As you likely know, not all retirement income is taxed the same way. Some income is fully taxable, some is partially taxable, and some can be excluded from your federal taxable income altogether.
Knowing which income is tax-free can help you make the most of your retirement money and keep more of it available for everyday expenses. Here’s a look at five common types of retirement income the IRS won’t tax.
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Nontaxable income in retirement
This is not an all-inclusive list of types of income the IRS won’t tax. It’s merely a sampling, for educational purposes, of some common sources of retirement income.
Because every individual’s financial circumstances are different, consult a trusted tax advisor or certified financial planner who knows your situation and can offer tailored guidance.
1. Life insurance proceeds
Although life insurance typically isn’t considered retirement income in a traditional sense, a surviving spouse or other beneficiary may receive a payout that helps cover living expenses or supplement other income.
Important to know: Life insurance proceeds generally aren’t taxable income when paid to a beneficiary after the insured person’s death.
For example, if your spouse has a $500,000 life insurance policy and you receive the $500,000 death benefit after your spouse passes, you generally won’t owe federal income tax on those proceeds.
But…there are exceptions. Interest paid in addition to the death benefit is generally taxable. Special rules can also apply if you transferred a life insurance policy for value.
2. Qualified Roth account withdrawals
Qualified withdrawals from Roth IRAs and Roth 401(k)s are tax-free.
That’s a key advantage of Roth retirement accounts. You contribute money after paying income taxes on it, so you don’t get an upfront tax deduction. In exchange, you generally don’t pay federal income tax on qualified withdrawals in retirement.
- For a Roth IRA, withdrawals are generally qualified if you’ve met the five-year holding period and are at least 59½.
- The five-year period generally starts with the first tax year for which you made a Roth IRA contribution.
- Other qualifying circumstances include becoming disabled or dying.
- Roth 401(k) distributions are also tax-free when they meet the applicable requirements.
A simplified example: If you withdraw $30,000 from a Roth IRA in retirement and the distribution is qualified, that $30,000 generally isn’t included in your taxable income.
Not every Roth withdrawal is automatically tax-free, though. If you take a nonqualified distribution, the earnings portion may be taxable and could be subject to a 10% additional tax.
3. Municipal bond interest
Interest from many municipal bonds is generally exempt from federal income tax.
- States, cities, and other government entities issue municipal bonds to help finance public projects.
- For retirees and others who want investment income, tax-exempt municipal bond interest can provide cash flow without increasing federal taxable income.
For example, if you receive $5,000 in tax-exempt interest from qualifying municipal bonds, that interest generally isn’t included in your federal taxable income.
There are exceptions. For instance, interest from certain private-activity municipal bonds can be subject to the alternative minimum tax.
State tax treatment can also vary. Depending on where you live and which bonds you own, you could owe state or local income tax even when the interest is exempt from federal tax.
Note for Retirees
Even though municipal bond interest is generally exempt from regular federal income tax, the IRS includes tax-exempt interest when calculating whether your Social Security benefits are taxable. That means municipal bond interest can push your combined income above the applicable thresholds, potentially making up to 85% of your Social Security benefits taxable.
Additionally, interest from certain tax-exempt private-activity municipal bonds may be included in income for purposes of the Alternative Minimum Tax (AMT). State or local income taxes may also apply, depending on where you live and which municipal bonds you own.
4. Part of some pension payments
If you contributed after-tax money to a pension or annuity, you generally don’t have to pay income tax again on the portion of your payments that represents your original investment.
This situation is more common with certain traditional pensions and annuities than with Social Security benefits or retirement accounts. The IRS generally refers to the after-tax portion as your “investment in the contract.”
For example, suppose you contributed $50,000 of after-tax money toward a pension. When you begin receiving payments, you generally won’t pay income tax on the portion of each payment that represents a return of that $50,000. The remaining taxable portion is generally included in your income.
The IRS has rules for determining how much of each payment is taxable and how much is tax-free. Depending on when your pension began and the type of annuity or pension you have, different calculation methods may apply.
So don’t assume that your entire pension check is taxable simply because it comes from a traditional pension. Check your plan documents and tax forms (and/or consult a tax attorney) to determine whether you have an after-tax investment in the pension.
5. At least 15% of Social Security benefits
Up to 85% of your Social Security benefits can be subject to federal income tax, but the taxable amount depends on your income.
The IRS uses a measure called “combined income” to determine how much of your benefits, if any, is taxable. Generally, it includes your adjusted gross income, tax-exempt interest, and half of your Social Security benefits.
For 2026, your benefits generally are tax-free if your combined income is less than $25,000 for single filers or $32,000 for married couples filing jointly.
Above those thresholds, up to 50% of your benefits may be taxable. And as mentioned, at higher income levels, that figure can rise to 85%.
|
Combined income |
Single |
Married filing jointly |
|
Benefits generally not taxable |
Less than $25,000 |
Less than $32,000 |
|
Up to 50% of benefits may be taxable |
25,000–34,000 |
32,000–44,000 |
|
Up to 85% of benefits may be taxable |
More than $34,000 |
More than $44,000 |
Another important consideration: Withdrawals from a traditional IRA or 401(k) can increase your combined income and may make more of your Social Security benefits subject to tax.
And…Under the 2025 Trump tax law, eligible taxpayers age 65 and older can claim an additional “senior bonus deduction” of up to $6,000 per person for 2025 through 2028. The deduction is subject to income limits and can reduce federal income tax owed, but it doesn’t change the rules for determining whether Social Security benefits are taxable.
State taxes on retirement income
Federal and state tax rules can vary for retirement income. Income that isn’t taxed by the IRS may still be subject to state tax, since states often have their own exemptions or deductions for retirement income.
- For example, nine states don’t impose an individual income tax.
- Other states may exempt Social Security benefits but tax some or all pension income, traditional IRAs, 401(k)s, or other retirement accounts.
- Some also provide special deductions or exemptions for older taxpayers or for certain types or amounts of retirement income.
State retirement taxes can make a significant difference if you’re considering where to retire. But don’t judge a state’s tax burden based solely on whether it has an income tax. As Kiplinger has reported, property taxes, sales taxes, estate and inheritance taxes, and other state and local levies can affect your overall cost of living.
If you’re comparing states for retirement, look at how each one would tax your specific mix of income and assets, rather than relying on a state’s reputation as being “tax-friendly” for retirees.
Retirement taxes: Bottom line
If you’re worried about taxes eating into your retirement income, start planning before you need to take distributions. Traditional IRA and 401(k) withdrawals, for example, are generally taxable, as are many other common sources of retirement income, including interest, dividends, and capital gains.
Look at your expected income for the year and consider how a withdrawal, investment sale, or other financial decision could affect your overall tax picture. In some cases, it can help to spread income out when possible, rather than creating a large taxable-income spike in a single year.
As mentioned above, don’t forget about state tax. If you’re considering a move in retirement, compare the tax rules in the states you’re considering based on your actual sources of income.