Are Retirement Pensions Taxable?

Tax on retirement pensions
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Saving up for retirement is important, and having a pension plan through your employer is a great form of income after you retire. But, as with most income sources, there might be taxes you have to pay when it comes to retirement money, like pensions.

Do you have to pay taxes on your retirement pension?

You have to pay taxes on your retirement pension just like on other income unless you live in one of the 14 states that do not collect taxes on pensions. But if your pension amount, or total retirement income, is less than the taxable amount, you also do not need to pay taxes.

This article explains when you pay taxes on your retirement pension and what exceptions there are to paying taxes on your pension. Then, I will explain how your different retirement income sources affect your tax amount. 

When You Must Pay Taxes on Retirement Pension

There are two ways to pay taxes on your retirement pension. 

  • You can pay them through withholdings throughout the year.
  • You can pay them at the end of the tax year when you file your taxes.

These two methods are similar to paying taxes when you were working. Your employer withholds a certain amount of taxes on each pension payment you receive, similar to how each paycheck you earned had taxes taken out.

However, if the tax you pay throughout the year through withholdings is not enough to cover your annual taxes owed, you will have to pay more at the end of the year when you file your taxes

You will also have to pay when you file your taxes if you choose not to withhold taxes from your pension payments throughout the year. 

On the other hand, sometimes your tax withholdings throughout the year are more than you owe at the end of the year, so you will get money back in the form of a tax refund.

The amount of taxes you have to pay on your retirement pension is the same as any other taxable income. So the more retirement pension you earn, the higher taxes you will pay, while still being subject to paying taxes in the same tax brackets as you were when you were working. 

The book A Concise Guide to Taxes in Retirement on Amazon gives you all the information you need to know about paying taxes after you retire.

You will also learn how to limit the amount you pay in taxes on your retirement income and any other income you have, like from savings and investments.

Exceptions to Paying Taxes on Retirement Pension

While paying money on your retirement pension is common, there are a few exceptions.  Fourteen states do not tax your pension income.

Here are the states, including two that tax 401k plans and IRA distributions but not pensions, marked with an asterisk. 

  • Alabama*
  • Alaska
  • Florida
  • Hawaii*
  • Illinois
  • Mississippi
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Although these states don’t require you to pay taxes on your retirement pension, there are other taxes that you have to pay. They charge higher taxes on your property or higher sales tax.

There might also be fewer resources for older people like senior centers and easy to access public transit.  To learn more about why these 14 states do not tax your pension and other taxes they might have, which often offset the lack of pension taxes.

The other exception to paying taxes on your retirement pension is if your income for the tax year is less than the standard deduction

For example, a single filer in 2022 had a standard deduction of $12,950, plus an additional deduction for people 65 or older, which is $1,750. 

The deductions vary if you file under a different status, such as married or head of household.  If your taxable income, including retirement pensions and any other sources of income like after-tax 401k for Social Security income, is less than your standard deduction, you will not pay any taxes for that tax year.

How Other Retirement Funds Affect Your Tax Amount

You have to pay taxes on all of your income even after retiring, which includes:

  • Pension payments
  • Money from other retirement accounts
  • Any other sources of income you still have after retirement

If you have a pension after you retire in addition to other retirement income like 401k's or a Roth IRA, your total taxable income is the sum of all your income. 

However, if you are subject to the exceptions listed above or if your retirement income is “after-tax,” you might not have to pay taxes on your income.

If any of your retirement income is “after-tax,” meaning you paid taxes on it when you put it into the retirement account, it will not count towards your taxable income. 

For example, say you have a retirement pension and an after-tax 401k, so you already paid taxes on it. Since you already paid taxes on your 401k, you only have to pay taxes on your retirement pension.

But if you have not paid taxes on your 401k yet, your taxable amount will be based on your total retirement income, which is the sum of your 401k and pension amounts.

Bottom Line

You have to pay taxes on your retirement pension, which is based on the total amount of your taxable income, similar to the amount of taxes you paid when you were working. 

There are exceptions to paying taxes on your retirement pension, such as if you live in one of 14 states that do not tax your pension amount or if you make less than the taxable amount that the federal government requires.


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