One of the most valuable things you can understand in retirement is which income sources are taxed, at what rate, and which are completely tax-free. The answer directly affects how much you keep.
Fully Taxable Income
These sources are taxed as ordinary income at your federal marginal rate:
- Traditional IRA withdrawals
- 401(k) and 403(b) withdrawals
- Required Minimum Distributions (RMDs)
- Pension and defined benefit income
- Interest income (bank accounts, CDs, bonds)
- Wages and self-employment income
- Rental income
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Partially Taxable Income
- Social Security benefits — 0%, 50%, or 85% taxable depending on your combined income. Most seniors fall in the 85% taxable tier.
- Qualified dividends and long-term capital gains — taxed at 0%, 15%, or 20% (lower than ordinary income rates). Many retirees qualify for the 0% rate.
Tax-Free Income
- Roth IRA distributions — completely tax-free if the account is at least 5 years old and you are 59½ or older
- HSA withdrawals for qualified medical expenses — no federal tax
- Life insurance proceeds — generally tax-free to beneficiaries
- Qualified Charitable Distributions (QCDs) — excluded from AGI when sent directly from an IRA to charity
- Municipal bond interest — federally tax-free (but note: still counts toward SS combined income and IRMAA MAGI)
Municipal bond interest is tax-free but not invisible. It still counts toward your "combined income" for Social Security taxability purposes and toward your MAGI for Medicare IRMAA surcharges. Many seniors are surprised to find that tax-free income raises their Medicare premiums.
See How All Your Income Sources Add Up
The Retirement Tax Estimator models your complete 2026 tax picture — federal, state, and IRMAA.