6 types of retirement income that aren’t taxed, and how to keep more of your money

Many retirees forget that federal and state taxes can reduce their retirement savings a lot. Taxes are harder to manage after retirement because most people live on a fixed income. If retirement taxes are not planned early, they can take a big bite out of hard-earned savings.

The good news is that not all retirement income is taxed in 2026. Knowing which income sources are tax-free helps retirees keep more money. Using tax-free income can help create a smarter and safer retirement plan, as stated by GOBankingRates.

Roth retirement income

Money taken from a Roth IRA or Roth 401(k) is tax-free after age 59½. Roth accounts do not give a tax break when you add money, but withdrawals are tax-free. With a Roth account, taxes are paid upfront instead of during retirement.


People with high incomes may not qualify to contribute directly to a Roth account. Traditional retirement accounts can be converted into Roth accounts at any time. Roth conversions are taxed like regular income in the year of conversion. Starting a Roth early usually avoids a large tax bill later in life. A large traditional retirement account can lose a big portion to taxes.

Tax-free inheritance money

Investment income from regular brokerage accounts is also usually taxable, as noted by GOBankingRates. Inheritances should not be the main plan for retirement income. Receiving an inheritance is never guaranteed. Many inheritances are not large enough to fully support retirement. Even so, many Americans receive inheritances that help boost savings.

Inheritances are usually tax-free for the person who receives them. Some states still charge inheritance taxes, including Iowa and Pennsylvania. Estate taxes, when they apply, are taken before the inheritance reaches you.

Municipal bond income

Municipal bonds are issued by states, cities, and local governments. These bonds are often used to pay for schools, roads, and public projects. Interest earned from municipal bonds is not taxed at the federal level. Bonds issued by your home state are often free from state tax too. Municipal bonds are popular in high-tax states like California. They are considered safer investments for retirement income.

HSA retirement savings

Health Savings Accounts give a tax deduction when money is added. Money inside an HSA grows without being taxed. Withdrawals from an HSA for medical expenses are tax-free. Medical expenses cover a wide range of healthcare costs. Withdrawing HSA money for non-medical reasons before age 65 has a 20% penalty.

After age 65, HSA money can be withdrawn for any reason without a penalty. Non-medical HSA withdrawals after 65 are taxed as normal income. Using an HSA for healthcare is the best way to stay fully tax-free.

Social Security taxes

Social Security income is often not taxed if it is your only income. Higher total income can cause part of Social Security benefits to be taxed. Single filers earning $25,000 to $34,000 may pay tax on up to 50% of benefits, as per GOBankingRates. Single filers earning above $34,000 may pay tax on up to 85% of benefits. Married couples have higher income limits but similar tax rules. Combined income includes adjusted gross income and other interest. Combined income also includes half of Social Security benefits.

Social Security payroll tax is 6.2% on wages up to $184,500. Medicare tax is 1.45% on all wages. High earners pay an extra 0.9% Medicare tax. Self-employed workers pay both employee and employer Social Security taxes. A new senior tax deduction may reduce taxable income for people 65 and older. Some states still tax Social Security benefits differently.

Life insurance payouts

Life insurance payouts are not a smart plan to rely on for retirement. Many seniors still receive life insurance payouts later in life. Life insurance payouts can be very large and helpful. Lump-sum life insurance payments are usually tax-free. Installment life insurance payments may have different tax rules. Using multiple tax-free income sources can protect retirement savings, as mentioned by GOBankingRates. Understanding tax rules helps retirees keep more of their money.

FAQs

Q1. What retirement income is not taxed in the U.S.?

Some retirement income like Roth withdrawals, inheritances, municipal bond interest, certain HSA withdrawals, some Social Security benefits, and life insurance payouts can be tax-free.

Q2. How can retirees legally reduce taxes on retirement income?

Retirees can lower taxes by using tax-free accounts, planning income sources wisely, and understanding federal and state tax rules.