How Retirement Income Is Taxed (And Why It's Higher Than You Expect)

Most retirement plans eventually run into one big surprise:

Taxes in retirement are often higher than people expect.

For some retirees, taxes do drop.

For many professionals with significant savings, retirement income is taxed more heavily than they anticipated, and the reason usually comes down to how the different income sources interact.

In this episode, I walk through:

• Why retirement taxes are about interaction, not just rates
• How Traditional IRA and 401(k) withdrawals are taxed as ordinary income
• Why long-term capital gains in taxable accounts may be taxed at a lower rate
• Why Roth withdrawals are generally tax-free
• How up to 85% of your Social Security benefit can become taxable depending on your total income

Here's a simple example. A retiree pulling $70,000 from an IRA and receiving $30,000 in Social Security may find that the IRA withdrawal pushes their total income high enough that a portion of the Social Security becomes taxable too.

A withdrawal strategy that looks simple on the surface can quietly raise your lifetime tax bill.

That's why retirement income taxes work best inside a broader plan that considers:

• Portfolio withdrawals
• Social Security timing
• Roth and Traditional balances
• Capital gains exposure
• Long-term tax flexibility

If you're within a few years of retirement, this is usually where the tax questions get personal:

• Which accounts should I pull from first?
• How do I keep my Social Security from being pushed into the taxable zone?
• Should I consider Roth conversions before retirement starts?
• How do capital gains fit in?
• How do I coordinate all of this over time?

That's exactly what this stage of planning is about.

This is Episode 5 of the 12-part Retirement Transition Series for those 5–10 years from retirement.

If you're thinking about this stage of planning, you may also want to see:

→ Retirement Income Planning

→ Retirement Transition Field Guide

→ Retirement Transition Series

Missed Episode 4? Watch it here, or move forward to Episode 6, where I explain how a Roth conversion works and when it can be one of the most powerful tax planning moves available.