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Thursday, December 07, 2023

What taxes do I pay in retirement?

What taxes do I pay in retirement?

What Taxes Do I Pay in Retirement?

One often-overlooked aspect of retirement planning is the impact of paying taxes in retirement. When people do consider this, they commonly want to know two things: Will they have to pay taxes in retirement, and is retirement income taxable?

The short and general answer is yes — individuals and couples generally must pay taxes in retirement. Some of the taxes assessed while working will no longer be paid in retirement, but other taxes will still be due.

No more payroll taxes

Payroll taxes (or self-employment taxes if you were a self-employed individual) are one of the main types of tax that are no longer paid in retirement. Also known as FICA (Federal Insurance Contributions Act) taxes, payroll taxes are withheld and paid by employers from their employees’ paychecks to cover employees’ contributions to Social Security and Medicare.

FICA taxes are broken down as follows: 6.2% of wages for Social Security (capped at $160,200 of wages for 2023) and 1.45% of wages for Medicare (no limit), for a total FICA tax rate of 7.65%. Also, if you are a high-income earner (earning more than $200,000 for single or $250,000 for joint filers) you may also have been subject to an additional Medicare tax of .9%. Once you’re retired and no longer receiving a paycheck or generating income as a self-employed individual, you’ll no longer pay FICA or self-employment taxes.1

Federal and state income taxes remain

Assuming you have taxable income in retirement above certain thresholds, you will still be subject to federal income taxes as well as state income taxes if you live in a state that collects income tax on certain types of retirement income.

This includes income from pre-tax retirement plans like pensions, annuities, IRAs and 401(k)s. Such taxable income is taxed at the following ordinary income tax rates for 2023.2

Tax rate

Single filers

Married filing jointly

Head of household


$0 – $11,000

$0 – $22,000

$0 – $15,700


$11,000 to $44,725

$22,000 to $89,450

$15,700 to $59,850


$44,725 to $95,375

$89,450 to $190,750

$59,850 to $95,350


$95,375 to $182,100

$190,750 to $364,200

$95,350 to $182,100


$182,100 to $231,250

$364,200 to $462,500

$182,100 to $231,250


$231,250 to $578,125

$462,500 to $693,750

$231,250 to $578,100


$578,125 or more

$693,750 or more

$578,100 or more

However, income derived from after-tax retirement accounts like Roth IRAs and Roth 401(k)s is not taxable in retirement at the federal or state level. This is because contributions to these types of accounts were made after taxes were paid on the income, so the contributions have already been taxed.

Municipal bonds are another potential source of tax-free retirement income. Distributions from muni bonds are often free of federal, and sometimes also state and local, income taxes. Note: Muni bond gains may be subject to capital gains taxes upon disposition.

Distributions from health savings accounts (HSAs) are also tax-free in retirement if the funds are used to pay for qualified medical expenses.3 If HSA distributions are used for any purpose other than qualified medical expenses, they’re subject to federal income tax at ordinary income tax rates. Additionally, if a nonqualified distribution from your HSA is made before the age of 65, you may still be subject to a 20% penalty on the distribution.

Other taxes in retirement

In addition to federal and state income taxes, you will also have to pay sales taxes when you retire. Sales taxes are assessed when you purchase goods and some services — everything from clothing and electronics to restaurant meals. How much you end up paying in sales taxes depends on your shopping habits and the sales tax rates in your city and state.

If you own your home, you’ll have to continue paying property taxes after you retire. This is one of the biggest tax burdens for many retirees because property taxes are based on the value of the home, which may rise over time. If you itemize deductions on your income tax return, however, you may be able to claim property taxes as an itemized deduction, which could lower your tax bill. It is important to note that currently state income, sales and property taxes are subject to a $10,000 cumulative maximum deduction cap if you itemize your deductions.4

Finally, depending on your income, you might have to pay the Net Investment Income Tax (NIIT) after you retire. This is a 3.8% Medicare surtax that applies to net investment income above certain thresholds. The NIIT generally applies to interest, dividends, and capital gains and losses, as well as income from passive sources. If your modified adjusted gross income is above $200,000 (or $250,000 if you’re married and file your income taxes jointly) in 2023, you will be subject to the NIIT on all or a portion of your net investment income.5

Are Social Security benefits taxable?

Approximately 56% of Social Security recipients must pay income tax on their Social Security benefits.6

Taxation of your Social Security benefits depends on whether you have modified adjusted gross income above certain levels after you retire. If you do, figure out your combined annual income by adding your nontaxable interest and half of your Social Security benefits to your adjusted gross income (or AGI). If you’re single and your combined income is between $25,000 and $34,000 a year — or if you’re married and file jointly and your combined income is between $32,000 and $44,000 a year — up to 50% of your Social Security benefits will be taxable.7

However, if you’re single and your combined income is more than $34,000 a year — or if you’re married and file jointly and your combined income is more than $44,000 a year — up to 85% of your Social Security benefits will be taxable.7No more than 85% of Social Security benefits is ever taxable, regardless of the amount of your modified adjusted gross income.7

The following states also assess state income tax on Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont and Utah.8 While Social Security benefits may be taxable in such states, some do provide for a lower limit on how much of those benefits may be taxed. Colorado, for instance, provides a subtraction limit for most types of retirement income sources (including Social Security benefits) up to $24,000 per individual over age 65.8 You will want to confirm with your state of residency to determine if any applicable exclusions apply each tax year.

Next steps for you

Figuring out what taxes you will pay in retirement can get complicated. Consider the following steps to help prepare yourself for retirement.

  1. Sign up for Empower’s free financial tools to get access to the Retirement Planner, a tool that will help you estimate your portfolio’s chance for supporting you in retirement.
  2. Speak with your tax advisor and personal financial planner for guidance on managing your money in retirement.

1 Nerdwallet, “How FICA Tax and Tax Withholding Work in 2022-2023,” November 2022.

2 Tax Foundation, “2023 Tax Brackets,” October 2022.

3 IRS, “Health Savings Report,” 2021.

4 IRS, “Topic No. 503 Deductible Taxes,” October 2022.

5 IRS, “Questions and Answers on the Net Investment Income Tax,” September 2022.

6 Social Security Administration, “Income Taxes on Social Security Benefits,” 2015.

7 U.S. News and World Report, “How 2023’s Social Security COLA May Raise Retiree Tax Bills,” November 2022.

8 The Balance, “Which States Tax Social Security Benefits?” October 2022.


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