Retirement Income and Your Taxes: How to Plan for Withdrawals, Pensions, and Social Security (A 2025 Planning Guide)

Pillar 1: Decoding Your Retirement Account Withdrawals (IRAs & 401(k)s)

How your withdrawals are taxed depends entirely on the type of account you’re pulling from. This is the most controllable part of your retirement tax picture.

Traditional IRAs & 401(k)s: The Taxable Pipeline

Since you contributed to these accounts with pre-tax dollars, every dollar you withdraw is taxed as ordinary income, at your marginal tax rate for the year. This includes your Required Minimum Distributions (RMDs), which are mandatory withdrawals you must start taking from these accounts at age 73. Failing to take your full RMD can result in a steep IRS penalty.

Roth IRAs & 401(k)s: The Tax-Free Haven

This is where smart planning pays off. Because you funded Roth accounts with after-tax money, all your qualified withdrawals in retirement are 100% tax-free. Roth withdrawals do not add to your taxable income, which makes them an incredibly powerful tool for managing your tax bracket from year to year.

Pillar 2: Understanding Tax on Pensions and Annuities

Similar to traditional retirement accounts, the taxability of your pension or annuity payments depends on how it was funded. At the end of the year, you’ll receive a Form 1099-R detailing the amounts and their tax status.

• Fully Funded by Employer: If your employer made all the contributions and you contributed nothing, your pension payments are fully taxable as ordinary income.
• Contributory Plans: If you contributed with after-tax dollars, a portion of each payment is considered a tax-free return of your contributions, while the rest (the earnings) is taxable.

Pillar 3: The Big One — How Your Social Security is Taxed

The tax treatment of Social Security benefits is often the most surprising part of retirement finances. Your benefits are not automatically tax-free; their taxability depends on your other income.

The IRS uses a formula based on your “provisional income” (also called combined income) to determine if you owe taxes on your benefits.

Based on that total, here’s how the taxability of your benefits is determined for 2025:

• Single Filers:
  • If provisional income is over $34,000, up to 85% of your benefits may be taxable.
  • If it’s between $25,000 and $34,000, up to 50% may be taxable.
• Married Filing Jointly:
  • If provisional income is over $44,000, up to 85% may be taxable.
  • If it’s between $32,000 and $44,000, up to 50% may be taxable.

Putting It All Together: The Power of a Withdrawal Plan

The key to tax planning is understanding how these pillars interact. Taking a withdrawal from your Traditional IRA increases your AGI. This not only makes the withdrawal itself taxable but can also cause more of your Social Security benefits to become taxable by pushing up your provisional income.

Example: A $10,000 withdrawal from your Traditional IRA could result in more than $10,000 of newly taxed income when you factor in its effect on your Social Security.

Conversely, a qualified withdrawal from a Roth IRA is tax-free and does NOT count towards your AGI or your provisional income. This allows you to access funds without creating a negative tax chain reaction.