Social Security Taxation: Federal and State

At the federal level, Social Security benefits are taxed based on 'provisional income': your AGI plus tax-exempt interest plus 50% of SS benefits. Below $25,000 ($32,000 MFJ), no SS is taxed. Between $25,000-$34,000 ($32,000-$44,000 MFJ), up to 50% of SS becomes taxable. Above $34,000 ($44,000 MFJ), up to 85% of SS becomes taxable. These thresholds were set in 1984 and never indexed for inflation, so most retirees today have at least 85% of their SS taxable federally.

At the state level, only 9 states tax Social Security in 2026: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Several of these (CO, CT, NM, RI, WV) have generous exemptions that effectively eliminate SS tax for most retirees. Minnesota and Montana have stricter rules that catch middle-income retirees.

The 41 states that don't tax SS include all 9 no-income-tax states (AK, FL, NV, NH, SD, TN, TX, WA, WY) plus 32 states that tax other income but specifically exempt Social Security. This includes high-income-tax states like California, Oregon, and New York — surprisingly retiree-friendly on this dimension despite high overall taxes.

Strategic implication: a retiree drawing $40,000 of SS plus $40,000 of pension income who lives in Connecticut faces ~$2,000 in state SS tax annually plus tax on the pension. The same retiree in Florida faces $0 in state tax. Across a 25-year retirement, the difference exceeds $50,000 — without considering compounding.

Pension Income: State Treatment Varies Wildly

Pension income (defined-benefit plan distributions, traditional 401(k)/IRA withdrawals) is treated dramatically differently across states. Some states fully exempt pension income; others tax it as ordinary income; many have partial exemptions based on age or retirement type.

Full exemptions: Illinois exempts virtually all retirement income (pensions, IRAs, 401(k)s, even Social Security) — a major draw despite the state's relatively high income tax rate on wages. Mississippi and Pennsylvania similarly exempt most retirement income (Pennsylvania's 3.07% rate doesn't apply to retirement distributions). New Hampshire has no income tax at all (the old dividend/interest tax was phased out by 2025).

Military pension exemptions: 30+ states fully or partially exempt military retirement pay. Notable full exemptions include Alabama, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, and Wisconsin. Some states extend the exemption to other government pensions (federal, state, local); others limit it to military.

Partial exemptions and senior credits: Maryland exempts up to $39,500 of pension income for those 65+; Michigan exempts most pension income for those born before 1946 (with declining exemptions for later cohorts); New York exempts up to $20,000 of qualified pension income; Georgia exempts up to $65,000 of retirement income for those 62+. These rules require attention to detail — the dollar amounts and age requirements change frequently.

401(k) and IRA Withdrawals: When and Where

Traditional 401(k) and IRA withdrawals are taxed as ordinary income at the federal level (no preferential capital gains rate). At the state level, they're typically treated like other retirement income, subject to the same exemptions and quirks discussed for pensions. Roth 401(k) and Roth IRA withdrawals are tax-free at both federal and state levels (assuming the 5-year rule and age 59½ tests are met).

Required Minimum Distributions (RMDs): under SECURE 2.0, the RMD age is 73 for those who turned 72 after 2022, and increases to 75 for those turning 74 after 2032. RMDs are calculated using IRS uniform lifetime tables and force pre-tax retirement assets to be withdrawn (and taxed) starting at the RMD age. Failing to take an RMD triggers a 25% penalty (reduced from 50% under SECURE 2.0), so this is a non-optional event.

Pre-RMD planning windows: the gap between retirement (often age 60-65) and RMD age (73-75) is typically the lowest-income period of a retiree's life. Strategic Roth conversions during this window can move pre-tax assets to Roth at low marginal rates, reducing future RMDs and the resulting tax bombs.

Worked example: a couple retires at 62 with $1.5M in traditional IRAs. They live on $40K of taxable income (Social Security plus modest withdrawals) for the next 11 years before RMDs hit. They convert $40K-$60K to Roth annually during this window, paying 12-22% federal tax. By age 73, they've moved $500K+ to Roth at low rates instead of facing forced withdrawals at 24-32% rates after RMDs combine with full Social Security.

IRMAA: The Hidden Medicare Tax

Income-Related Monthly Adjustment Amounts (IRMAA) increase Medicare Part B and Part D premiums for higher-income retirees based on AGI from two years prior. For 2026, the standard Part B premium is $185/month, but high earners pay surcharges that can push the total to $629/month — over $5,300/year of additional 'tax' per person, or $10,600 for couples.

The 2026 IRMAA brackets for Part B (single / MFJ): standard $185 (≤$103K / ≤$206K), tier 1 $258 ($103-129K / $206-258K), tier 2 $369 ($129-161K / $258-322K), tier 3 $480 ($161-193K / $322-386K), tier 4 $592 ($193-500K / $386-750K), tier 5 $629 (>$500K / >$750K). Each tier increases monthly premium by ~$73-110.

The cliff effect: IRMAA brackets are cliffs, not gradual phase-ins. Earning $1 more than the threshold throws you into the next tier for the entire year — costing $876+ extra per person per year. A couple with $206,001 of AGI pays $1,752 more in Medicare than a couple with $206,000 — for a $1 difference in income. This makes precise tax planning around IRMAA brackets extremely valuable.

Common triggers: large Roth conversions (counts as ordinary income in the conversion year), one-time capital gains from selling stock or property, large RMDs that push AGI over a threshold, taxable IRA-to-IRA rollovers handled incorrectly. Planning workarounds: spread conversions across multiple years, harvest capital losses to offset gains, time large taxable events to fall in the same year (since you're paying the surcharge regardless once you cross a threshold).

Roth Conversion Strategy in Retirement

Roth conversions in retirement are often the highest-ROI tax move available. The arbitrage: paying tax now at a known rate to escape paying tax later at an unknown (likely higher) rate. With federal brackets scheduled to revert to pre-TCJA levels in 2026 (already extended through 2026 by recent legislation, but the long-term direction is uncertain), today's relatively low rates are a planning gift.

Mechanics: convert any amount from traditional IRA to Roth IRA, paying ordinary income tax on the conversion. There's no income limit (unlike contributions) and no annual cap. The converted amount grows tax-free in the Roth and avoids all future RMDs during the original owner's lifetime.

Bracket-filling strategy: model your retirement income before conversion. If your AGI is $80K and the 22% bracket extends to $109K, convert exactly $29K to fill the bracket without spilling into 24%. If you have a year with unusually low income (between job loss and Social Security), convert aggressively to capture the rate arbitrage.

IRMAA awareness is critical. A couple with $200K of base income who converts an additional $50K crosses into a higher Medicare tier, costing an extra $2,000+ per couple per year on top of the conversion tax. The break-even may still favor the conversion, but the calculation changes. Some retirees split conversions across two tax years specifically to avoid IRMAA brackets.

The Best States for Retirees (Tax-Adjusted)

The top retirement tax states combine no/low income tax with retirement income exemptions and reasonable property/sales taxes. Florida and Texas top most lists for tax efficiency: no state income tax (so SS, pensions, IRAs all flow through tax-free), property tax exemptions for senior homeowners (Florida's homestead exemption + Save Our Homes cap, Texas's senior freeze), and moderate sales tax.

Tennessee is similarly strong: no income tax, no tax on dividends/interest after the Hall Tax was repealed in 2021, low property tax (effective 0.7%), and 7% sales tax. Tennessee has become a major retiree destination as a result.

Surprise winners: Pennsylvania has a 3.07% income tax on wages but exempts virtually all retirement income — making it tax-efficient for retirees while costly for working residents. Mississippi similarly exempts most retirement income, plus has the lowest cost of living in the country. Wyoming has no income tax, the lowest property tax of all 50 states, and the lowest sales tax.

Worst retirement tax states: California (8% on $40K of pension income, but no SS tax), Oregon (9% top rate on most retirement income, no SS tax), Connecticut (taxes SS above thresholds, plus pension), Minnesota (taxes SS, plus pension), Vermont (taxes SS, plus pension). New York is mixed — generous exemptions on pensions and IRAs, plus no SS tax, but high property taxes and 8.82% top rate on income above the exemptions.