Taxable, Partially Taxable and Tax-Free Retirement Income

Is retirement income taxable? It depends on where your retirement income will come from, and how much of it you will have. Below is a list of common sources of retirement income broken down into taxable retirement income, partially taxable retirement income, and tax-free retirement income. Use this list only for general guidance. You must use IRS guidelines, which can change, or a qualified tax preparer who is familiar with your finances to give you a final say on which items will result in taxable retirement income.

Taxable Retirement Income

  • Withdrawals from Traditional IRAs, 401ks, or other retirement plans. If a plan was funded with pre-tax dollars, whether by you or your employer, it will result in taxable retirement income when withdrawn.
  • Pension income. Most pensions are a source of taxable retirement income.
  • Interest income, dividend income and capital gains inside of after-tax accounts. Interest, dividends and capital gains that occur within tax-deferred accounts, such as IRAs, 401k plans or variable annuities, are not taxable in the year they occur. Instead, all gains are deferred and you only pay tax when you take a withdrawal.
  • Withdrawals from an annuity. When you take withdrawals from a fixed or variable annuity (one that is not owned by an IRA or retirement account) the IRS rules say any gain must be withdrawn first, and this gain is taxed as ordinary income. Once all gain has been withdrawn, you would be withdrawing your basis, or principal. Withdrawals of basis are not counted as taxable retirement income.

Partially Taxable Retirement Income

  • 50-85% of your social security income may be taxable.



  1.           If your combined income is over the social security limit.



• Non-deductible IRA withdrawals. If you have traditional pre-tax IRA contributions as well as after-tax, non-deductible IRA contributions, a portion of each non-deductible IRA withdrawal may be    considered gain, and a portion your basis. The gain portion is considered taxable retirement income.

• Income from an immediate annuity which was purchased with after-tax money. If the immediate annuity was purchased with pre-tax money, such as in an IRA or retirement account, all of the income will be taxable.
• Proceeds from cashing in a cash value life insurance policy. Any portion attributed to gain will be taxable. Your basis (usually the total of all your premiums paid) is not taxable retirement income to you.
Tax Free Retirement Income
  • Roth IRA withdrawals. If you meet ROTH IRA withdrawal requirements.
  • Interest income from municipal bonds. Most municipal bond income is free from federal income taxes, but you may be subject to state income taxes on this form of retirement income.
  • Loans from life insurance policies. After you take a loan from a life insurance policy if you terminate the policy before repaying the loan, at that time a portion of the loan amount may become taxable income to you.
  • Income from a reverse mortgage.
  • After-tax contributions withdrawn from a 401k or other employer sponsored plan.
  • Any income which is a return of your own principal or cost basis. For example, suppose you purchased a variable annuity with $10,000 of after-tax money. You cash it in at age 60 when it is worth $12,000. The $2,000 of gain is taxed as ordinary income. The $10,000 is your cost basis, or original principal, and is not taxable income to you.
  • Gain from the sale of your home If gain is less than $250,000 for a single, or less than $500,000 for married filers, you have lived in home for at least two of last five years and met other IRS requirements.
  Tax Advice Disclaimer Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. The distributor of this document disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. If you have questions regarding accounting issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.
*Source: Dana Anspach. Taxable, Partially Taxable and Tax-Free Retirement Income,, Web,