One of the most common questions I hear as clients approach retirement is, “How will my different accounts be taxed once I start taking income?” It’s a great question—because in retirement, not all income is treated the same.
Most retirees draw income from a mix of accounts, and understanding how each one is taxed can help set more realistic expectations and reduce surprises along the way.
Traditional IRA and 401(k) Accounts
Traditional IRAs and 401(k)s are typically funded with pre-tax dollars, which means withdrawals are generally taxed as ordinary income. Once Required Minimum Distributions begin, these withdrawals are required and can increase taxable income in those years.
Roth Accounts
Roth IRAs and Roth 401(k)s are funded with after-tax dollars. If certain requirements are met, qualified withdrawals are generally tax-free. Because of that, Roth accounts can play a role in creating tax diversification during retirement.
Taxable Brokerage Accounts
Taxable brokerage accounts are also funded with after-tax dollars, but they may generate capital gains or dividend income. Depending on how long investments are held and current tax rules, this income may be taxed differently than withdrawals from retirement accounts.
Why Understanding This Matters
When these accounts are used together, the timing and source of withdrawals can influence a retiree’s overall tax picture. The goal isn’t to eliminate taxes—because that’s rarely realistic—but to better understand how different income sources may interact over time.
Being informed about how retirement accounts are taxed can help retirees make more confident, well-reasoned decisions as their income needs evolve.
Disclosures: This material is for informational purposes only and is not intended as tax, legal, or investment advice. Investors should consult with their tax advisor or financial professional regarding their individual situation.