You’re Retiring. Get Ready for These Tax Changes

While you're still working, taxes are a pretty straightforward matter, at least as far as your job goes. Your employer withholds money from your paycheck for your taxes, and you adjust your withholdings and claim tax deductions when you file your taxes.

Once you retire, your taxes are quite different. You may not have to worry about certain payroll taxes or deductions. Yet you’ll now have to account for taxes on your retirement plan withdrawals and Social Security benefits. And, if you continue to do some work in retirement, you may have to balance the taxes you pay on "passive" income with that you earn from your job.

Here’s what you need to know and do about your taxes in retirement.

Social Security income

Social Security benefits, the fruits of years of working and paying into the Social Security system, are a foundation of retirement finances for most Americans. The amount received depends on your income from your working years. In turn, how much, if any, of your benefits are subject to tax depends on how much you receive — and, in some cases, on the state in which you live.

To find out whether your income is taxable by the federal government, take half of the Social Security benefits you collected during the year, and add it to your other income (such as retirement account withdrawals, dividends or capital gains).

If your tax filing status is single and your total income is more than $25,000, part of your Social Security benefits are taxable. (The figure for joint filers is $32,000.) The proportion that’s taxable is half of the earnings for those whose taxable income is above the numbers above, but less than $34,000 and $44,000 respectively. Above those levels, the proportion of your benefits that are subject to taxes rises to as much as 85%.

As of 2025, Social Security benefits are also taxable in the following states: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. State rules can vary significantly, so check with your state's policies to make sure you understand how Social Security income is taxed.

A twist if you take Social Security early

In addition to being taxable, your earnings may reduce how much you receive in Social Security benefits. (Only employment income is considered here, not that from pensions, withdrawals from retirement accounts or capital gains.)

For people born in 1960 or later, the full retirement age (FRA) is 67. If you claim Social Security before you reach your FRA, some of your retirement benefits could be withheld.

• Before you reach the FRA: You can earn up to $23,400 in 2025 without benefit withholding. Over that threshold, $1 is withheld for every $2 in earnings over the limit.
• In the calendar year you reach FRA (applied only to months before FRA): Your benefits are reduced by $1 for every $3 you earn above $62,160.
• After you reach FRA: Once you reach FRA, your earnings no longer affect your Social Security benefits.

Note that there’s an important twist to how much your income may affect what you receive from Social Security In the first year of your retirement. The Social Security Administration may use a monthly earnings test during that period. You can still receive benefits in the months you're truly retired, even if your total earnings exceed the annual limit. Once you reach the FRA, the Social Security Administration recalculates your benefit amount to credit you for the months benefits were withheld.

Employment income

Many people work in some way during retirement. Whether it's gig work or a part-time position, working can help supplement your retirement savings. However, your employment income is subject to tax, just as it was before you retired. Income you earn at a job is added to your income from retirement fund withdrawals, annuity income and Social Security benefits. With your wages factored in, your total income could increase by enough to push you into a higher tax bracket.

Some other income-based taxes continue in retirement. The Federal Insurance Contributions Act (FICA) is a federal payroll tax. It's deducted from your wages to pay into the Social Security and Medicare systems. There is no age exemption for FICA. Even if you retire, you'll still have to pay it if you continue working.

If you're self-employed, you'll also have to pay the higher self-employment tax rate, which covers both the employer and employee side of FICA.

Retirement accounts

About six in ten American retirees draw income from a tax-advantaged retirement account like a 401(k) or an individual retirement account (IRA). Depending on the type of account, you may have made contributions with pre-tax dollars, and your money will have grown tax-deferred. The trade-off is that once you retire, you have to pay taxes on the funds you withdraw from a traditional IRA or 401(k).

The one exception is a Roth account, such as a Roth IRA or Roth 401(k). With a Roth, you make contributions with post-tax dollars, so you can withdraw money tax-free in retirement.

How withdrawals are taxed

If you retire early and withdraw money before you reach the age of 59½, you'll have to pay penalties and income taxes on the withdrawals. But, if you wait until after you reach the full retirement age, you won't have to pay a penalty. Instead, you'll pay only the normal income tax rate for your withdrawals.

Required minimum distributions (RMDs)

If you have money in tax-advantaged accounts, the IRS doesn't allow you to keep your money in the account indefinitely. Once you reach the age of 73, the IRS currently requires you to take out withdrawals — known as required minimum distributions (RMDs — each year. The RMDs' size is based on your account balance and life expectancy.

Even if you don't need the income that the withdrawals deliver, the IRS still requires you to make them, and you'll be taxed on the withdrawals as income. If you do not meet RMD requirements, there are penalties. You'll have to pay a 25% excise tax on the amount that you didn't withdraw as required.

The bottom line

Taxes don't stop in retirement, but they may change, and not only because your overall income drops. You'll need to consider the rules for retirement accounts, such as how withdrawals are taxed, how much you have to withdraw each year and how your income affects Social Security benefits.

As you plan for retirement, it may be wise to consult with a certified professional accountant (CPA) or certified financial planner (CFP). These experts can help you plan how to manage your taxes and minimize your tax bill. Strategies like converting accounts into Roths can reduce your taxable income in retirement and give you more flexibility over when you make withdrawals from funds.

Professional help can also assist you with other aspects of retirement, such as answering questions about whether you still need life insurance in your retirement years, and how to set up your assets to be as accessible and tax-friendly as possible for your heirs.