Taxes on Retirement Income: 401(k), IRA, Social Security
Understanding how retirement income is taxed is essential for planning your retirement finances. Different types of retirement income are taxed differently — some are taxed as ordinary income, some not at all, and Social Security has its own unique rules.
Traditional vs. Roth Accounts: The Tax Difference
| Feature | Traditional (401k / IRA) | Roth (401k / IRA) |
|---|---|---|
| Contributions | Pre-tax (may be deductible) | After-tax (not deductible) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxed as ordinary income | Tax-free (if qualified) |
| Required Minimum Distributions | Required starting at age 73 | Not required (Roth IRA); required for Roth 401k |
| Early withdrawal penalty | 10% penalty before age 59½ | 10% on earnings before age 59½ |
Traditional 401(k) and IRA Withdrawals
- All withdrawals from traditional pre-tax accounts are taxed as ordinary income in the year received
- The full amount (contributions + earnings) is taxable because contributions were made pre-tax
- Withdrawals before age 59½ typically trigger a 10% early withdrawal penalty in addition to income tax
- Exceptions to the 10% penalty: disability, death, substantially equal periodic payments, first-time home purchase (IRA only, up to $10,000), higher education expenses (IRA only), and others
- Withdrawals are reported on Form 1099-R
Roth IRA and Roth 401(k) Withdrawals
- Qualified Roth distributions are completely tax-free
- To be "qualified," the account must be at least 5 years old AND you must be 59½ or older (or disabled, deceased, first-time homebuyer)
- Roth IRA contributions (not earnings) can be withdrawn tax- and penalty-free at any time
- Roth IRAs have no required minimum distributions during the owner's lifetime
- 2025 Roth IRA contribution limit: $7,000 ($8,000 if age 50+)
Required Minimum Distributions (RMDs)
Once you reach a certain age, the IRS requires you to withdraw a minimum amount from traditional retirement accounts each year:
- RMDs must begin by April 1 of the year after you turn age 73 (under SECURE 2.0 Act, applicable for those who turned 72 after December 31, 2022)
- The RMD amount is calculated based on your account balance and IRS life expectancy tables
- Applies to: traditional IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and most other employer plans
- Penalty for missing RMD: 25% of the amount not distributed (reduced to 10% if corrected promptly)
- RMDs are taxable as ordinary income in the year of distribution
Social Security Benefits: Are They Taxable?
Whether your Social Security benefits are taxable depends on your combined income (also called "provisional income"): your AGI + non-taxable interest + 50% of Social Security benefits.
| Filing Status | Combined Income | % of SS Benefits Taxable |
|---|---|---|
| Single | Below $25,000 | 0% |
| Single | $25,000 – $34,000 | Up to 50% |
| Single | Above $34,000 | Up to 85% |
| Married Filing Jointly | Below $32,000 | 0% |
| Married Filing Jointly | $32,000 – $44,000 | Up to 50% |
| Married Filing Jointly | Above $44,000 | Up to 85% |
Social Security benefits are never 100% taxable — the maximum is 85%. Many retirees with modest income pay no tax on Social Security at all.
2025 Retirement Account Contribution Limits
| Account Type | 2025 Limit | Catch-Up (Age 50+) |
|---|---|---|
| 401(k), 403(b), 457 | $23,500 | +$7,500 = $31,000 |
| Traditional and Roth IRA | $7,000 | +$1,000 = $8,000 |
| SEP-IRA (self-employed) | Up to $69,000 (or 25% of compensation) | N/A |
| SIMPLE IRA | $16,500 | +$3,500 = $20,000 |