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Life After Paychecks: leave the lesson and go back to the map

Your Retirement Tax Bill

  1. Warm-up
  2. Story
  3. Learn
  4. Play
  5. Quiz
  6. Remember
  7. Try it
  8. Finish

About this lesson

About 15 minutes · 5 quiz questions

The big idea: In retirement, each kind of income is taxed its own way, so where you take money from changes your tax.

Lesson outline

The big idea: In retirement, each kind of income is taxed its own way, so where you take money from changes your tax.

The story: Grace’s four kinds of money

Grace lays out four kinds of retirement income on the kitchen table, and Ruth helps sort out how each one is taxed.

  1. Narrator: Grace takes money from four places: Social Security, a traditional IRA, a taxable fund account and a Roth IRA.
  2. Grace: I thought a dollar was a dollar. Why does my tax change with where I take it from?
  3. Ruth: The IRA dollar is regular income. A long-term fund gain gets a lower rate. The Roth dollar isn’t taxed at all.
  4. Narrator: And part of Social Security may be taxed, depending on Grace’s other income that year.
  5. Grace: So before I take money out, I should know which kind it is.

What you’ll learn

  1. Regular income

    Withdrawals from tax-later accounts, most pensions, wages and interest are taxed as regular (ordinary) income, using the tax brackets. Short-term gains on things held a year or less count here too.

  2. Lower rates and no tax

    In a taxable account, long-term gains and qualified dividends get lower capital-gains rates. Qualified Roth withdrawals, and HSA money spent on medical bills, aren’t taxed at all.

  3. Social Security is partly taxed

    Depending on your other income, none or part of your Social Security is taxed. Taking more from an IRA can raise the taxed share, so one withdrawal can move your tax two ways.

  4. Marginal, effective and the 65+ boost

    Marginal rate: the tax on your next dollar. Effective rate: your average. At 65+, a single filer’s standard deduction is $16,100 plus $2,050. Through 2028, a senior deduction adds $6,000 per person 65+, less at higher incomes.

Key words

ordinary income
income taxed at regular bracket rates
marginal rate
the tax on your next dollar
effective rate
your average tax: total tax divided by total income
standard deduction
the amount of income that isn’t taxed, for people who don’t itemize

Common questions

Is there a special tax break for seniors right now?
Yes. For 2025 through 2028, people 65 and older can take an extra senior deduction of $6,000 each, on top of the standard deduction or itemized deductions. It shrinks at higher incomes.
Are state taxes the same?
No. States treat retirement income very differently. Some don’t tax Social Security or pensions at all. Check your state’s tax agency.

Remember this

Different money, different tax. Know which you’re taking.

Try it: Sort your own income

  1. Find your last tax return.
  2. List each kind of income you had and its group: regular, capital-gains rate, partly taxed or tax-free.
  3. Work out your effective rate: total tax divided by total income.

Your last tax return and a sheet of paper (no account needed).

Live facts

Numbers that change over time, with when they were last checked and where they come from.

Builds on

Leads to

Lessons teach how money works. They are not financial advice.