What Do Taxes Actually Look Like in Retirement?
Your retirement income isn't one number the IRS taxes once. It's four or five different income streams, each taxed under a different rulebook — and the mix you draw from changes what you actually keep, sometimes by thousands of dollars in a single year.
- Social Security, pensions, 401(k)/IRA withdrawals, and brokerage gains are all taxed differently — Social Security on a sliding scale, pensions and 401(k) draws as ordinary income, brokerage gains at capital-gains rates on the gain portion only. Blending them into one flat "tax rate" assumption misses real money.
- The order and mix you draw from accounts changes your total tax bill, not just this year's. In a real test run below, shifting the same $60,000 of retirement withdrawals from a 401(k)-heavy mix to a brokerage-heavy mix — same income, same state — dropped the annual tax bill by $2,400.
- Where you live is its own lever, separate from account mix. Run your own numbers below — free, no signup, nothing leaves your browser.
Retirement income isn't taxed as one number
Most back-of-envelope retirement math treats income as a single pile that gets taxed at "your bracket." It doesn't work that way once you're actually retired and drawing from multiple accounts at once. The IRS taxes each source under its own rules:
- Social Security is taxed on a sliding scale — depending on your other income, anywhere from 0% to 85% of your benefit becomes taxable. It is never taxed on more than 85% of the benefit, no matter how high your other income is, but a lot of retirees are surprised any of it is taxable at all.
- Pension income and 401(k)/IRA withdrawals are taxed as ordinary income, dollar for dollar, the same as a paycheck was during your working years — no preferential rate.
- Roth withdrawals, once qualified, are tax-free. Not tax-deferred — tax-free, permanently, which is exactly why the account exists.
- Taxable brokerage withdrawals are taxed at capital-gains rates (0%, 15%, or 20% federally, depending on income), and only on the gain portion of the withdrawal — the return of your own principal isn't taxed again.
Four income sources, four different rulebooks. A retiree pulling $80,000 a year entirely from a 401(k) owes a meaningfully different tax bill than a retiree pulling the same $80,000 split across Social Security, a brokerage account, and a Roth — even though both retirees would describe their income the same way.
Social Security's sliding scale catches people off guard
Here's the mechanism, because it trips up more people than any other piece of retirement tax planning: the IRS calculates a "combined income" figure — your adjusted gross income, plus any tax-exempt interest, plus half of your Social Security benefit. Cross certain thresholds and up to 50% of your benefit becomes taxable; cross higher thresholds and up to 85% becomes taxable.
The part that surprises people: those thresholds haven't been adjusted for inflation since the 1980s, which means more retirees cross them every year without changing their lifestyle at all. And because the formula depends on other income, a retiree who draws more from a 401(k) in a given year can inadvertently push more of their own Social Security into taxable territory — the two aren't independent decisions, even though they feel like separate accounts.
Why the order you draw from accounts matters more than people think
This is the part flat calculators skip entirely, and it's not a rounding error. Drawing from a taxable brokerage account first keeps ordinary income low in the early retirement years, which can also keep more of your Social Security untaxed. Drawing from a 401(k) first front-loads ordinary income and can push both your federal bracket and the taxable portion of your Social Security higher, sooner than expected.
Which account you draw from first isn't just a cash-flow decision. It's a tax decision — and it compounds over the whole retirement, not just the year you make it.
It also matters in the other direction. Drawing too conservatively from tax-deferred accounts early in retirement doesn't avoid the tax bill — it defers it into the years Required Minimum Distributions (RMDs) force money out whether you need it or not, often at a point when Social Security, a pension, and the RMD itself are all stacking into the same tax year. A withdrawal strategy that ignores this can cost tens of thousands of dollars over a full retirement compared to one that sequences withdrawals deliberately.
State taxes are a bigger lever than most retirees realize
This is a separate axis from account mix, and it's easy to underweight because it doesn't feel like a "strategy" — it feels like geography. Some states charge no income tax at all, on any income, retirement or otherwise. Others exempt Social Security specifically but tax 401(k) and pension withdrawals as ordinary income. (Which state you retire in can be a bigger lever than it looks.) A handful tax everything the same as a paycheck, with no retirement-specific treatment at all. For anyone weighing a relocation in retirement — and plenty of retirees do — this is a real, recurring number, not a one-time moving expense.
Why simple calculators get this wrong
Most quick retirement calculators either ignore taxes entirely — showing a gross withdrawal number as if it's spendable cash — or apply one flat percentage across all income, regardless of source or state. Both understate the real picture in some cases and overstate it in others. A retiree in a no-tax state pulling mostly from a Roth might owe close to nothing; a retiree in a high-tax state pulling heavily from a 401(k) with a large Social Security benefit can owe a meaningfully higher effective rate than a single flat-rate guess would suggest. "Tax drag" isn't a rounding error at retirement-planning scale — it changes what a plan can actually support.
A worked example
Take a single retiree, age 67, with $30,000 a year from Social Security, $40,000 from a 401(k) withdrawal, and $20,000 from a taxable brokerage withdrawal — $90,000 in gross income either way. Run that exact mix through the calculator above in Florida, a state with no income tax, and the total annual tax burden comes out to $8,673 — an effective rate of 9.6%.
Change nothing except the state to California, and the same $90,000 of income, same account mix, produces a total tax burden of $10,515 — an effective rate of 11.7%. That's $1,842 a year in state tax alone, on identical income.
Now hold the state fixed at California and change only the mix — same $90,000 of income, same $30,000 of Social Security, but $20,000 from the 401(k) and $40,000 from the brokerage account instead of the reverse. Total tax drops to $8,115 — an effective rate of 9.0%. Same income, same state, same year. The only thing that changed was which account the withdrawal came from.
| Scenario | Total annual tax | Effective rate |
|---|---|---|
| Florida · 401(k)-heavy draw ($40k / $20k) | $8,673 | 9.6% |
| California · 401(k)-heavy draw ($40k / $20k) | $10,515 | 11.7% |
| California · brokerage-heavy draw ($20k / $40k) | $8,115 | 9.0% |
Two separate levers, same order of magnitude of impact: the state you retire in and the accounts you draw from both move the number by thousands of dollars, on identical gross income, in a single year. Neither shows up if you're using a flat percentage or ignoring taxes altogether.
What this doesn't capture
The numbers above are a single-year snapshot at the inputs you give it — an honest answer to "what would this year's tax bill look like," not a full multi-decade tax plan. It doesn't project how RMDs grow a tax-deferred balance's mandatory withdrawals larger over time, doesn't model the long-run benefit of doing Roth conversions in lower-income years before RMDs start, and doesn't account for future tax law changes, which are out of any model's reach. Treat a surprising effective rate as the start of a real planning conversation about sequencing and account mix — not the end of one.
How this is calculated
The numbers above come from the same tax engine that powers the full app: 2026 federal tax brackets, all-50-state-plus-DC tax modeling, IRMAA-tier awareness for Medicare-linked surcharges, and results expressed in today's dollars. It's free to run, with no account required. The complete math, including the specific assumptions and data sources, is documented in the methodology.
Common questions
This article runs one calculator on your inputs for a single year. The full app models your complete plan — tax-aware withdrawal sequencing across your entire retirement, RMDs, state relocation scenarios, and more, all stress-tested against real market history.
Run your full plan free →