- Written by Terry Turner
Senior Financial Writer and Financial Wellness Facilitator
Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).Read More
- Edited BySavannah Pittle
Senior Financial Editor
Savannah Pittle is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.Read More
- Published: March 18, 2023
- Updated: May 2, 2023
- 7 min read time
- This page features 14 Cited Research Articles
- Edited By
- You may owe income taxes on some forms of retirement income, including Social Security benefits, pension benefits and traditional IRA or 401(k) withdrawals.
- The amount of income tax you’ll owe depends on how much income you report.
- You may have to pay tax penalties on retirement income if you received pension income or withdrew money from retirement accounts before you reached age 59 1/2.
- You can also be penalized if you’re aged 72 or older and didn’t withdraw enough money from your retirement accounts to meet the Required Minimum Distribution (RMD).
- You can minimize the amount of income tax you’ll owe in retirement by speaking to a qualified tax professional ahead of time.
What Is Ordinary Income Tax?
Ordinary income taxes fund general government expenses such as roads, schools and many line items in the federal budget. They don’t fund Social Security benefits like OASDI taxes do.
The amount you’ll owe in ordinary income tax differs for everyone. People get taxed based on their total annual income minus deductible expenses. The more income you make in a calendar year, the higher your tax rate.
Types of Retirement Income Subject To Ordinary Income Taxes
Many types of retirement income are subject to ordinary income tax. That includes money from Social Security, pension benefits and withdrawals from most traditional retirement accounts.
Social Security Benefits
Depending on your total combined income for the year, the federal government may tax part of your Social Security benefits at your ordinary income tax rate. You can calculate your combined income by adding half of your annual Social Security benefit amount to the rest of your income (your adjusted gross income plus any nontaxable interest).
If you’re single and have a combined income between $25,000 and $34,000, you’ll pay income tax on 50% of your Social Security benefits. If your combined income is more than $34,000, you’ll pay tax on 85% of your benefits.
The Internal Revenue Service (IRS) has higher income thresholds for married couples. If you’re married and file a joint return with a combined income between $32,000 and $44,000, you’ll pay income tax on 50% of your benefits. If your combined income is higher than $44,000, you’ll pay income tax on 85% of your benefits.
Pension and Annuity Income
Pension and annuity income may be subject to ordinary income tax, but it depends how your or your former employer funded your pension or annuity.
- If your pension or annuity was funded using after-tax dollars, your benefits aren’t taxable.
- If your pension or annuity was funded using pre-tax dollars, your benefits are fully taxable.
- If your pension or annuity was funded with a mix of after-tax dollars and pre-tax dollars, you’ll owe taxes on the portion of your benefits that represent a return from the pre-tax portion.
Traditional IRA and 401(k) Withdrawals
Withdrawals from traditional IRAs and 401(k) accounts are subject to ordinary income tax. However, withdrawals from Roth IRAs and Roth 401(k) accounts do not get taxed since they were funded with after-tax dollars.
Other Sources of Retirement Income
Most other sources of retirement income are subject to income tax, including dividend income and income from rental properties.
2023 Tax Rates and Brackets
The government divides ordinary income tax rates into categories, which it calls brackets. Each tax bracket reflects a specific income range.
Your taxes get calculated in chunks as your total income stair-steps into higher brackets. In other words, one bracket does not apply to all of your income. Tax rates only apply to the portion of your income that falls within that bracket’s range.
For example, consider a single person who earns $50,000 a year in 2023. Using the table below, the person’s first $10,999 of income does not get taxed. The second chunk, from $11,000 to 44,725 will be taxed at the 12% rate. And the remainder of the income ($5,275) will get taxed at 22%.
|Tax Rate||Taxable Income for Single Filers||Taxable Income for Married Couples Filing Jointly|
|0%||Under $11,000||Under $22,000|
|12%||$11,001 to $44,725||$22,001 to $89,450|
|22%||$44,726 to $95,375||$89,451 to $190,750|
|24%||$95,376 to $182,100||$190,751 to $364,200|
|32%||$182,101 to $231,250||$364,201 to $462,500|
|35%||$231,251 to $578,125||$462,500 to $693,750|
|37%||$578,126 and Above||$693,751 and Above|
Taxation of Required Minimum Distributions (RMDs)
If you’re age 72 or older, you must withdraw a certain percentage of most types of retirement account funds each year. The IRS calls this amount the Required Minimum Distribution (RMD). If you turn 72 after Dec. 31, 2022, your RMD age is 73.
Your RMD rises as you age to account for your changing life expectancy. Rates also differ for single people and married people.
If you don’t withdraw enough money from your retirement accounts in a calendar year to meet your RMD, you’ll pay a tax penalty equalling 25% of the difference between your RMD and the amount you withdrew. For example, if your RMD for the year is $10,000 and you only withdrew $5,000, you’ll pay $1,250 in penalties. You’ll also owe income tax on the $5,000 you should have withdrawn.
State Income Taxes on Retirement Income
Besides federal income taxes, some states levy state income taxes on retirement income. Tax rates vary from state to state. Some states tax Social Security benefits, others tax pensions and some apply taxes to IRA and 401(k) withdrawals. There are many combinations of what gets taxed and what doesn’t. Also, a few states have no state income tax at all.
If you want to minimize your retirement taxes, you may benefit from moving to a state that doesn’t have a state income tax. They include Florida, Nevada, Texas, Tennessee, Washington, Wyoming and South Dakota. However, variances in property taxes, sales taxes and other tax assessments could eat into your potential savings.
Special Considerations for Early Retirement
If you retire early, you’ll have to pay additional taxes if you want to take money from your retirement accounts. For example, you’ll pay a 10% penalty on any early pension benefits you receive or any money you withdraw from your IRA or 401(k) before age 59 1/2.
To avoid this tax, you can build alternate sources of income into your retirement plan. You might, for instance, choose to live on withdrawals from a regular savings account until you reach age 59 1/2. After that, you can draw on your retirement accounts without incurring a penalty.
When To Consult with a Tax Professional
If you think income taxes may eat into your retirement savings, it’s a good idea to talk to a tax professional.
Tax experts can help arrange your finances to minimize your income tax liability in retirement. They can also point out tax deductions you can use to reduce your tax burden, including tax credits that are available only to seniors.
Frequently Asked Questions About Ordinary Income Taxes
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14 Cited Research Articles
- Internal Revenue Service. (2023, February 1). Topic No. 410 Pensions and Annuities. Retrieved from https://www.irs.gov/taxtopics/tc410
- Internal Revenue Service. (2023, January 31). Tax Guide for Seniors: for use in preparing 2022 Returns. Retrieved from https://www.irs.gov/pub/irs-pdf/p554.pdf
- Internal Revenue Service. (2023, January 26). Topic No. 409 Capital Gains and Losses. Retrieved from https://www.irs.gov/taxtopics/tc409
- Internal Revenue Service. (2022, December 8). Retirement Topics — Required Minimum Distributions (RMDs). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
- Internal Revenue Service. (2022, November 10). What is Taxable and Nontaxable Income? Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/what-is-taxable-and-nontaxable-income
- Internal Revenue Service. (2022, October 18). IRS provides tax inflation adjustments for tax year 2023. Retrieved from https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
- Internal Revenue Service. (2022, September 19). Retirement Topics - Exceptions to Tax on Early Distributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
- Miller, M. (2022, March 25). What Retirement Means for Your Taxes. Retrieved from https://www.nytimes.com/2022/03/25/business/retirement-taxes-social-security.html
- Institute on Taxation and Economic Policy. (2022, March 21). Tax Breaks for Elderly Taxpayers in the States in 2022. Retrieved from https://itep.org/tax-breaks-for-elderly-taxpayers-in-the-states-in-2022/
- Polston Tax Resolution & Accounting. (2019, October 3). Tax Brackets: Do You Really Know How You’re Taxed? Retrieved from https://polstontax.com/tax-brackets-do-you-really-know-how-youre-taxed/
- Investor.gov. (n.d.). Individual Retirement Accounts (IRAs). Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/self-directed-plans-individual-retirement-accounts-iras
- Investor.gov. (n.d.). Traditional and Roth 401(k) Plans. Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/traditional-and-roth-401k-plans
- Social Security Administration. (n.d.). Income Taxes And Your Social Security Benefit. Retrieved from https://www.ssa.gov/benefits/retirement/planner/taxes.html
- Internal Revenue Service. (n.d.). Retirement Plan and IRA Required Minimum Distributions FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs