Social Security uses a formula unlike anything else in the tax code. 'Provisional income,' adjusted gross income plus tax-exempt interest plus half of your Social Security benefit, determines how much of the benefit is taxed. Below $25,000 (single) or $32,000 (married filing jointly), none of it is federally taxable. Above $34,000 (single) or $44,000 (MFJ), up to 85% becomes taxable. These thresholds haven't been adjusted for inflation in decades, which is why more retirees owe tax on Social Security every year even though nothing about their benefit changed.

Pension payments and withdrawals from a traditional IRA or 401(k) are taxed as ordinary income, added to your other income and taxed at your marginal federal bracket, exactly the way a paycheck would be. There's no special federal discount for the fact that the money came from a retirement account rather than a job. Whatever bracket a dollar of pension or IRA income lands in is the rate you pay on it, full stop.

Roth IRA and Roth 401(k) withdrawals are the exception that makes the whole system worth planning around. Once an account is 'qualified,' generally meaning you're at least 59½ and the account has been open at least five years, withdrawals are entirely free of federal income tax, including all the growth, not just your original contributions. Contributions themselves (the money you put in, as opposed to the earnings) can typically be withdrawn tax- and penalty-free from a Roth IRA at any time, since you already paid tax on that money before it went in.

Capital gains and qualified dividends from a taxable brokerage account run on an entirely separate federal rate schedule from ordinary income, generally 0%, 15%, or 20% depending on your total taxable income, with an additional 3.8% Net Investment Income Tax at higher income levels. This is why the same dollar amount of income can be taxed very differently depending on whether it came from selling an appreciated stock versus withdrawing from a traditional IRA, the IRA withdrawal is ordinary income no matter how the underlying investments performed, while the brokerage gain gets the lower rate.

Non-qualified annuities, meaning annuities purchased with after-tax dollars outside a retirement account, use an 'exclusion ratio' to split each payment between a tax-free return of your original principal and a taxable portion representing the earnings. Once the original principal has been fully recovered through this ratio, typically after a period tied to your life expectancy at the time of purchase, the entire remaining payment becomes taxable. Annuities held inside an IRA or 401(k) don't get this treatment, they're taxed under the regular rules for that account type instead.

Health Savings Account withdrawals are federally tax-free when used for qualified medical expenses, at any age, making the HSA the only account offering this specific combination: a tax deduction going in, tax-free growth, and tax-free withdrawals coming out, provided the money is spent on medical costs. After age 65, non-medical HSA withdrawals are taxed as ordinary income but no longer carry the 20% penalty that applies to non-medical withdrawals before 65, functionally converting the account into something like a traditional IRA for any balance not used for healthcare.

Rental income, side-business income, and other active income sources some retirees maintain are taxed as ordinary income as well, though rental income can be reduced by depreciation and other deductions that lower the taxable amount well below the actual cash received. Inherited retirement accounts carry their own rules layered on top of all of this: an inherited traditional IRA is ordinary income to the beneficiary when withdrawn, generally within a 10-year window under the SECURE Act, while an inherited Roth IRA passes on the same tax-free treatment the original owner enjoyed.

Because each income source is taxed under different rules, the order you draw from your accounts, and how much you draw from each, is one of the highest-leverage decisions in retirement, arguably more consequential than investment selection. A withdrawal strategy that ignores these differences, drawing proportionally from every account rather than deliberately, routinely costs households tens of thousands of dollars over a retirement in avoidable tax.

This is also why 'what's my tax bracket in retirement' isn't a complete question on its own. Your bracket depends on how much of each type of income you recognize in a given year, and you generally have real control over that mix, when to take IRA withdrawals versus Roth withdrawals, when to realize capital gains, how much of a Roth conversion to do in a given year, in a way you didn't have nearly as much control over while earning a W-2 paycheck.

• Assuming all retirement income is taxed the same way, and building a withdrawal plan around a single blended 'my tax rate' number instead of the actual rules for each source.
• Withdrawing from Roth accounts early or unnecessarily, when tax-free Roth money is generally more valuable held for later years, or for heirs, than spent first.
• Not accounting for the annuity exclusion ratio, and either over- or under-estimating how much of an annuity payment is actually taxable.
• Treating brokerage account capital gains like ordinary IRA withdrawals when comparing the tax cost of two different funding sources for the same spending need.
• Overlooking that state tax treatment of these same income sources can differ enormously from the federal treatment, Arizona doesn't tax Social Security at all, for example, while still taxing IRA and pension withdrawals under its flat rate.